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Warranties

■ Warranty should be limited to material compliance with the company documentation and no longer than ninety days. Paid support and maintenance provide protection following the warranty period.

■ Exclusive remedy for breach of the warranty should be limited to the company repairing or replacing the software.

■ Certain statutory warranties may be “implied” and should therefore be specifically disclaimed/excluded. Any written warranties or statements not in the agreement (e.g., marketing materials) should also be disclaimed and excluded.

■ Avoid numerous additional warranties.

Support and Maintenance; Professional Service Rates

■ Typically “support” is help desk support and error correction/bug fixes; “maintenance” is providing periodic releases and updates to the software.

■ Make clear the customer is not entitled to new versions or new functionality as part of standard support. Be wary of customer requests to rewrite or expand the company’s definitions of bug fixes and updates. These revisions are typically designed to give the customer new versions or other functionality for which the company would otherwise charge an additional fee.

■ Unless the transaction is very substantial, the customer must understand that the company cannot materially alter its standard support program. In particular, the company cannot commit to support service level requirements that are different from its normal support metrics. Service levels should be framed as “goals” or indicate the company will use commercially reasonable efforts to achieve those levels, typically priced annually, include automatic renewal of the support term, if possible.

■ Avoid committing to support the software indefinitely. The company should not commit to provide support for more than five years from the initial date of the license.

■ Avoid support commitments that could require the company to provide “free” professional services. If the customer calls with a support problem that turns out to be caused by the customer’s own products, the company should have the ability to charge for its time.

■ While rates can vary based on services provided, or nature of the software, support and maintenance are often priced based on a percentage (e.g., 15%-25%) of the license fee. Avoid agreeing to cap support fees for more than three to five years.

■ Some customers may ask the company to fix the company’s time and materials rates for professional services. The company may agree not to increase its fees for six months to a year, but should generally avoid longer commitments. After the initial period in which the fees are fixed, they become the company’s “then current rates.”

Payment

■ Payment of license fees should not be contingent or uncertain. Payment should be based on an objective easily identifiable occurrence (e.g., delivery of the software to the customer).

■ Any testing and acceptance language insisted on by the customer should be carefully worded, strictly time-limited, and reviewed by legal counsel. Avoid keying acceptance or the triggering of fees on events within the sole control of the customer. Acceptance and payment events should be keyed to objective milestones or passage of time.

■ License fees should not be subject to refund, except for failed acceptance testing.

■ Unless agreed differently, payment for services (e.g., installation, customization, and implementation) is typically based on monthly invoices from the company based on time and materials basis. Avoid fixed-fee arrangements if possible.

■ It is often important to explain to the customer that due to certain revenue recognition rules, license fees and other payments cannot be contingent or subject to refund. The company must ensure it will be fairly compensated for its software and any services provided.

Term and Termination

■ The term (length) of the agreement must be consistent with license type and the term of support. For example, a perpetual license may be granted with a support term that only lasts for several years. Support terms are typically written with an initial term (e.g., one to three years) with automatic year-to-year renewal thereafter.

■ Generally, upon termination of the agreement, all licenses immediately terminate. Provisions can be made for perpetual license continuing even if support is terminated. In any event, language is typically included making clear that licenses to end users do not terminate on termination of the customer’s agreement.

■ Even a perpetual license is subject to termination for misuse of the software or breach of any license restrictions.

■ Each party should have notice and opportunity to cure before termination for cause (except breach of confidentiality, misuse of the software, or bankruptcy, which may result in immediate termination).

Infringement Indemnification

■ The company could indemnify the customer if it is sued by a third party claiming that the company software, standing alone, infringes the third party’s patent, copyright, or trade secret rights.

■ Provisions must be carefully drafted by legal counsel, as the company’s liability for infringement is typically unlimited.

■ In the event of a claim, the company controls the defense and settlement of the claim and the customer must cooperate. The indemnity language may also require the customer to avoid making any admissions regarding the litigation unless consented to by the company or required in sworn discovery responses.

■ The company should only indemnify for claims arising out of the company’s software “standing alone”—e.g., not combined with third-party products or software, including any intellectual property of the licensee.

Summary

The summary provided in this chapter highlights different topics and issues that a company should consider in negotiating a customer software license or OEM agreement. The checklist and summary provided should be used to minimize the time required to negotiate these types of agreements, making the process more seamless and protecting the company’s business and legal objectives.

 
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