Finding IP Value
Should You Worry About a Software Audit?
It goes without saying that businesses use software ubiquitously. Perhaps easier to miss at times is how any given company utilizes software – who uses a particular program and how many machines have the program installed – changes on a monthly, weekly or even daily basis. Such fluidity could expose your company to potential liability if it inadvertently allows too many copies of licensed software on its machines.
In this respect, software licenses contain provisions that every IT and human resource department should understand. For example, software seat licenses limit the number of times the licensee can install – that is, “copy” – a program on its computers. Exceeding that number could result in copyright liability.
This is because valuable software programs are protected under copyright law, and they are sold as part of well-planned licensing programs. One aspect of those programs is enforcement – the ability to objectively determine how many times a program was installed. The sophisticated software publisher uses the license contract to establish audit rights so it can determine whether a licensee exceeded its quantity. If so, publishers almost invariably demand payment of damages in an amount much greater than the extra seats would have cost up front.
Accordingly, every company that uses licensed software should be familiar with the following points in the context of software audits.
1. Document all purchases. It is a great thing when a client is prepared to provide – following an audit demand – an organized chronology showing proof of all the purchases. If the original license was 300 users, and a supplemental license obtained 25 additional users, be sure all of the documentation is retained and is cross-referenced. If the original license is replaced by a subsequent license, advise all relevant employees that the subsequent license is in lieu of – not in addition to – the original. Also retain the original with other important legal documents in case there is an audit months or even years after the original license was terminated.
2. Know the scope of the audit rights. Most licenses specify the scope of audit rights. However, publishers change their licenses from time to time, and older versions may be difficult to find. Publishers typically do not revise the terms to make audit rights more favorable to licensees, so it is important to retain a copy of the license each time software is purchased. Usually this can be done from the publisher’s website.
3. Institute safeguards to avoid inadvertently becoming “under-licensed.” Place value upon robust communication between those who procure software, and those who install and maintain it, and even the human resources department. After all, for programs used throughout the company, HR is a good resource to help correlate the flux of employees to changes in utilization.
4. Limit the conduct of the audit by written agreement. Before any exchange of information, have counsel establish in writing that any discussions with company employees during the audit are inadmissible as evidence. One should also seek agreement that the publisher will maintain the confidentiality of the results, and will not discuss those with third parties outside of the audit process. This would limit the publisher from reporting its findings to a third party, in the event the audit reveals possible issues of under-licensing with respect to software sold by the third party.
5. Investigate independently. Before the inspection occurs, use qualified consultants and technical people to determine whether a gap exists between the number of seat licenses versus utilization. In some cases, a company may want its counsel to retain an outside consultant, because work product under a consulting agreement generally is protected from disclosure in a subsequent lawsuit.
6. Evaluate the case early for liability and potential damages. Publishers have at least two pathways available for damages: statutory damages under the Copyright Act, and actual damages caused by the violation, which may include a portion of the infringer’s profits obtained through copying. Under the Copyright Act, if the publisher makes a proper showing, it becomes the company’s burden to prove it acted within the scope of its license. Always keep up to date copies of the licenses and amendments, along with proof of purchase, to facilitate the proof on this point.
7. Be transparent. Copyright infringement is a strict liability offense, meaning one does not have to intend to infringe for liability to attach. However, a court may reduce the award if it is persuaded that the infringer acted without awareness or reason to believe that was infringing. Conversely, courts may award statutory damages in the tens- or hundreds of thousands for willful copyright infringement. An appearance of cover up might become a factor in a willfulness charge. If it turns out the company is under-licensed, consider a quick settlement that does not require either side to incur substantial investigative resources.
8. Negotiate a forward-looking release. There are a number of provisions that should be proposed. Some examples include: (i) both sides pay for their own fees and costs associated with the audit (publishers usually cite the cost of investigation as a reason for higher damages); (ii) all claims are released with respect to all the publisher’s programs the company uses, from the time when software was first purchased through the date of the release; (iii) the publisher will forbear from conducting another audit for a set period of time; (iv) if the publisher conducts another audit, it may not investigate the status going back to the time of the first audit; (v) the publisher will not seek damages for inadvertent future violations that are not material; and (vi) if the publisher demands a subsequent audit, the company is entitled to conduct and report its own self-audit first – the result of which might satisfy the publisher that there was not a material violation.
Every case is different, and there is no guarantee a publisher will agree with such proposals. However, the likelihood of the publisher agreeing is greater if the proposals are addressed early in negotiation.
Software audits are never a pleasant occurrence, and they usually incur time and expense on multiple fronts. However, if the company faces possible exposure for violating a software license, the sooner containment efforts begin, the better the outcome, generally. Often, it is prudent to retain legal counsel as early as possible, with the goal to quickly evaluate the situation, arrange consultants whose input will be protected under work product privileges, and negotiate with the publisher to limit the scope of the audit process.