Software licensing audits are commonly used by software vendors to verify compliance with the terms and conditions of software license agreements. Software license agreements typically contain an audit right for the software vendor (licensor) and an obligation for the licensee to co-operate during such audits.
Licensing audits are, in principle, an effective tool for software vendors to ensure that the licensees’ use of the relevant software is covered by sufficient licenses. However, in practice, various issues may arise at different stages of the audit process which may undermine the proper conduct or even the lawfulness of the audit or otherwise render it less effective.
Below, we discuss a number of the most common issues and pitfalls.
Before the audit
- Contractual framework and enforceability
The contractual framework governing software licenses is not always straightforward.
A software license agreement does not typically consist of just one agreement or document. It is rather a patchwork of numerous documents including (master) service agreements, product terms, order forms, licensing policies, and so on.
Furthermore, software license agreements are rather ‘dynamic’. Licensees may for example, order new products or services, or alternatively, amend existing products or services. Affiliates may have the right to order products or services under a master agreement. And there are many more situations which may cause the contractual framework to change or which, at least, may necessitate, but not yet lead to, such change.
When preparing for an audit, it is therefore important to gather all contractual documents and map the contractual framework as this will determine the rights and obligations of both the licensor and the licensee.
In addition, it is recommended to verify its enforceability. Enforceability is particularly important with regard to general terms and conditions. To be enforceable, it must be proven that the contracting party has been duly notified of the general terms and conditions (expressly or at least implicitly) and has accepted these. However, fairly often, the subsequent acceptance of the general terms and conditions (for example through the clickwrap procedure) or other addenda, do not meet the requirements of the initial license agreement’s amendment clause. The question then arises as to whether this leads to the conclusion that the licensor cannot enforce the content thereof, and/or, that the licensee’s license is no longer valid. Enforceability of other ‘extra-contractual’ documents, such as licensing policies, which may not (or not expressly) have been accepted by the licensee should also be verified.
In this context, it is important to note that the Court of Justice of the European Union (CJEU) reconfirmed, in a recent ruling, that the licensee’s failure to comply with a clause relating to IP rights in a software license agreement must be regarded, not as a mere contractual breach, but also as an IP infringement within the meaning of the Enforcement Directive. Therefore, in such case, the software vendor should be able to benefit from the guarantees (including a variety of measures and remedies) provided by this Directive, irrespective of which liability regime (contractual or non-contractual) applies (Case C-666/18, 18 December 2019 – for more details, please read Raf Schoefs’ and Thomas Gils’ blog post on this subject). Thus, even in cases where a license agreement exists, an under-licensed situation may be considered, treated and sanctioned as a (non-contractual) IP infringement.
- Scope of the audit right
Depending on the software license agreement, the level of detail of the audit clauses may vary. In any case, the scope of the audit right must be duly assessed. Such scope encompasses a number of factors, including:
- What legal entities may be audited? Is the audit right limited to the licensee having signed the license agreement or does it also extend , by way of example, to affiliates or legal successors? What if the licensee’s core IT infrastructure has been relocated to an affiliate’s or third party’s premises or even to the cloud?
- What locations may be audited? May the licensor audit all locations of the licensee? Are there any territorial restrictions?
- What software products may be audited?
- What is the correlation and hierarchy between the license and maintenance agreement?
It goes without saying that the audit must be performed in accordance with the scope and procedure of the audit right granted to the licensor under the relevant agreement(s).
The probative value of a license report can often be questioned, for example when the procedure or the licensee’s right of defence has not been fully respected, when the external auditor’s independence and impartiality is not fully guaranteed or when their report contains too many caveats and reservations safeguarding their own liability.
During the audit
- Cooperation duty of the licensee
Software licensing audit clauses do not always detail the cooperation duty of the licensee. To avoid misunderstandings and discussions, it is recommended that the licensee’s obligations to cooperate and, more generally, the audit’s modalities and procedures are agreed upon from the outset.
If the software vendor intends to ask the licensee to run certain scripts or other tools, appropriate arrangements should be made to ensure that the scope of the audit is respected. This is all the more important as the licensor can, in principle, not force the licensee to run scripts or use tools if this was not contractually agreed.
In any case, as a rule of thumb, the licensee should provide the licensor with information that allows the licensor to verify compliance with the license agreement. Information that does not contribute to such verification, should not be provided.
- Licensing metrics
The licensing metrics defined in the relevant contractual documents form the basis for a licensing audit.
These metrics will be used to determine whether the use of software by the licensee corresponds to the number of acquired software licenses. Depending on the software product and the vendor, these metrics may vary. Software can be licensed, for example, for named users or for concurrent users, on a processor basis, for direct log-in (via user ID) or for access via a plug-in (API) or a similar indirect method, for a flat fee or for a variable fee depending on the type and amount of usage, etc.
Difficulties may arise where the licensor and the licensee interpret the metrics differently, especially in case of older license agreements of which the wording may be outdated, and that need to be applied to new technologies and interfaces in a way that was unanticipated when the agreement was initially signed.
A typical example of such situation is when the licensing metrics were agreed many years ago and now have to be applied to a new reality such as virtualisation of environments, which often proves to be particularly challenging.
At the end of the audit
- Settlement agreement
If the licensing audit shows there is or may be a licensing shortfall, the parties will often enter into negotiations and conclude settlement arrangements, which may come in different forms. However, it is important to consider the scope of such arrangement. Do the parties intend to settle the past dispute and waive all rights, claims and demands; and/or do they wish to remedy the licensing shortfall for the future? It goes without saying that the former gives more legal certainty as this scenario will settle the dispute in a definite manner.
When entering into a settlement agreement, the parties must bear in mind the general validity requirements, particularly that of valid consent. Among other reasons, consent may be considered invalid if it was given under pressure. In the past, there have been several cases whereby the Belgian courts annulled settlement agreements forced upon software licensees.
If the parties do not manage to reach a common interpretation, the dispute may finally need to be settled by ADR, such as mediation or arbitration or, ultimately, by court.
- (Punitive) damages
If the licensee has used software without appropriate licenses, the licensor may claim damages. The Enforcement Directive (2004/48/EC) provides that the damages must be appropriate to the actual prejudice suffered as a result of the infringement. In principle, this excludes punitive damages, a well established concept in common law countries. This should be borne in mind, in particular by software vendors from common law countries.
To obtain payment of damages, the infringer must demonstrate the suffered damages. Where the damages cannot be quantified, courts may determine the amount on an ex aequo et bono basis. In the past, Belgian courts have already awarded damages equalling 200% of the licensing fee. Where the infringing licensee needs to regularise the under-licensed situation by purchasing a regular license for future purposes, the total cost may thus amount to 300% of the standard license fee.
Impact of the new Belgian B2B Act on license agreements
On 1 December 2020, the Act of 4 April 2019 introducing, among other things, provisions on unfair terms in B2B contracts will enter into force. These new rules will be applicable to new agreements concluded as of 1 December 2020, or to existing agreements that are changed or extended on or after 1 December 2020.
Under these new rules, the following are some of the clauses that will be considered unlawful at all times and therefore null and void:
- clauses which give the undertaking the unilateral right to construe any term of the contract;
- clauses which, in the event of a dispute, have the other party waive any right of recourse against the undertaking; and
- clauses in which the purpose is to irrefutably establish knowledge or acceptance of the other party by means of terms which the other party would not actually have knowledge of prior to the conclusion of the contract.
In addition, certain clauses will be considered unlawful unless proven otherwise. This will apply for example to clauses that limit the means of evidence on which the other party may rely on.
Many factors may influence the lawfulness and/or success of a software licensing audit, as explained above. To avoid unpleasant surprises in this respect, it is important to duly prepare such audit and to perform the necessary assessments and seek appropriate counselling, where required.