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Limitation of Liability

The vendor’s limitation of liability is very important in a cloud computing engagement because virtually all aspects of data security are controlled by the vendor. Thus, the vendor should not be allowed to use a limitation of liability clause to unduly limit its exposure. Instead, a fair limitation of liability clause must balance the vendor’s concern about unlimited damages with the customer’s right to have reasonable recourse in the event of a data breach, security incident, or other damages.

A vendor’s limitation of liability clause usually (i) limits any liability of vendor to the customer to the amount of fees paid under the agreement or a portion of the agreement (e.g., fees paid for the portion of the software or services that gave rise to the claim), and (ii) excludes incidental, consequential (e.g., lost revenues, lost profits), exemplary, punitive, and other indirect damages. While a customer may not be able to eliminate the limitation of liability in its entirety, the customer should ask for the concessions in the following sections.

The Limitation of Liability Should Apply to Both Parties

Tire customer should at least be entitled to the same protections from damages that the vendor seeks.

■ Tire following should be excluded from all (i.e., any exclusion of consequential damages as well as any cap on direct damages) limitations of liability and damages: (i) damages, costs, and expenses arising out of breach of the confidentiality and data security provisions by either party; (ii) claims for which vendor is insured; (iii) damages arising out of and costs and expenses to be paid pursuant to the parties’ respective indemnification obligations; (iv) damages, costs, and expenses arising out of either party’s infringement of the other party’s intellectual property rights; and (v) damages, costs, and expenses arising out of breach of the advertising/publicity provision.

■ Tire overall liability cap (usually limited to fees paid) should be increased to some multiple of all fees paid (e.g., two to four times the total fees or the fees paid in the twelve months prior to the claim arising). Keep in mind that the overall liability cap should not apply to the exclusions in the bullet point above.

License/Access Grant and Fees

Tire license or access grant in a cloud computing agreement encompasses three main issues: permitted use, permitted users, and fees. The grant as to permitted use should be straightforward and broadly worded to allow the customer full use of the software. For example, “Vendor hereby grants Customer a worldwide, nonexclusive right and license to access and use the software for Customer’s business purposes.” Vendor agreements often try to limit the customer’s use of the software to “its internal purposes only.” Such a restriction is likely too narrow to encompass all customer’s desired uses. Drafting the license in terms of permitting the customer to use the software for “its business purposes” is a better, more encompassing approach.

Hie license rights related to which of customer’s constituents can use the software, and at what price, can be far more complicated. As to permitted users, the customer must carefully define this in light of its needs and its structure. For example, beyond customer’s employees, the customer may want affiliates, subsidiaries (now or hereafter existing), corporate parents, third parties such as outsourcers, consultants, and independent contractors all to have access to the software. The agreement should clearly set forth those users that fit the customer’s anticipated needs.

There are many options with respect to pricing. A vendor may make software available on an enterprise basis, per user, per account, per property, per a specified number of increments of use or processing power, or per a specified number of megabytes of storage. They will often charge for storage in excess of a base amount. Tire customer’s future use of the software is also an important consideration when negotiating fees. When entering into cloud computing agreements, anticipate and provide for the ability to add or remove users (or whatever unit the metric is based on), with a corresponding adjustment of the license fees. The best time for the customer to negotiate rates for additional use is prior to signing the agreement. Customers should also attempt to lock in any recurring license fees for a period of time (one to three years) and thereafter an escalator based on the consumer price index (CPI) or other third-party index.

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