SSCL Meeting Report: 21 March 2002

April 30, 1998

Software – some legal factors for success in 2002

SSCL continued their monthly series of themed meetings, this time looking at the civil side of software industry issues. There were two speakers for the evening: Lorne Byatt looked at legal success factors from an in-house counsel standpoint, whilst Jeremy Warner focused on software licensing issues.

Lorne Byatt read law at Cambridge and Edinburgh and, in addition to private practice, has spent about ten years as an in-house lawyer. He has recently joined Morton Fraser as a partner and heads up their e-business and IP team.

Lorne began by making the point that when he was first invited to be a speaker he would have been presenting a real life in-house lawyer’s view. But 2001 was a troublesome year for the technology sector (I had my own dot-com redundancy) and his in-house counsel position could no longer be justified by Voxar. Now a partner at Morton Fraser, his presentation has changed to look for the legal factors for success in 2002.

His presentation outlined a number of situations which software lawyers may have to deal with or guard against, with a common theme of Capture, Protect, Commercialise. He made the point that the audience would be advising software suppliers who had survived 2001 – and looked at what lessons could be learned. Examples were given by means of a hypothetical company where the main developer was a director but not an employee, so the contract of employment that reinforced the CDPA 88 did not apply (Lorne made the point that many early stage companies have directors without service contracts); the product launch that happened before a patent application was filed; and an occasion where the late discovery of a third-party patent seriously disrupted a project whilst the developer was forced to either negotiate a licence or attempt to acquire the proprietor. Good development companies will use a ‘product road map’ approach, together with an IP use map that details what is used in which product families, to identify any potential problems early and reduce risk and exposure.

Lorne then went on to look at the company’s two routes to market in 2002: firstly, to provide software products via a direct sales team, resellers, or both; and secondly, to provide custom software incorporated on an OEM basis into larger systems. He summarised by saying that the product route would likely require higher investment up front but provide quicker payback in end-user licence fees. By contrast, the OEM route may require little up front investment but payback via royalties is beyond the developer’s control. There are market norms so it may be better to be client-led on strategy choice rather than re-inventing the wheel. It may also be a good move to plan for both routes if investors are supportive, though the company should seek to cover its costs early on unless the investors are prepared to pay to gain market share. Coming back to Capture, Protect and Commercialise, Lorne suggested that the IP and commercialisation plan in each case will have common elements though there may be a few major differences – for instance, in the constraints which the OEM customer may require in relation to use by the company of background IP (e.g. algorithms) in other OEM projects or for re-use in software products. There is little doubt then that great care should be taken when negotiating an OEM contract.

Lorne finished by looking at end of process activities. Education of the sales channel on sales documentation issued by the legal team is perhaps an obvious statement but it would appear that it is often overlooked. From a commercial perspective, sales commission should be based not upon sales made, but on funds received. With the OEM route, a royalty audit may well be of benefit to guard against underpayment, though relationship management is equally important in this respect. A further angle is provided by the customers: who owns the IP in an improvement suggested by a customer? There should be provisions in the sales documentation to deal with this. Certainly, remembering Capture, Protect, Commercialise is one way to look for issues before they arise – rather than having to firefight – and may give your clients a more palatable year than they had in 2001.

Jeremy Warner then picked up Lorne’s strand on license strategies. A graduate of Aberdeen and Edinburgh Universities, he holds a Masters in IT and Telecommunications Law from Strathclyde and is an associate in Biggart Baillie’s IP and Technology group.

Jeremy began his licensing presentation by saying he had typed “licence hunting” into an internet search engine and discovered that you have to be over 18 to hunt moose in Canada! But the basis of the discussion was use licence versus ownership, and the misunderstanding that can occur between the software industry and its customers. Lack of clarity can (and has) led to bad feeling, misuse of software, and litigation – as ever, prevention is better than cure.

Traditionally, the software licensing strategy would inevitably involve an end-user licensing agreement, where the customer is the end-user and not the purchaser. Thus, the licence is not a sale, only a licence to carry out activity that would otherwise be prohibited by copyright restrictions.

Jeremy took us back ten years when it was commonplace for software contracts to prohibit the software being moved onto a new piece of hardware. As networked computing became more commonplace, these reduced use restrictions became more painful for users. Licensing for a set number of users, rather than specific hardware, now takes precedence. We are also seeing a move towards software that cannot be used until the licence is accepted – shrink-wrap, click-wrap or web-wrap – where users are at least given the opportunity of becoming more aware of the licensing terms by accepting them up-front.

Jeremy added that another recent trend was a move towards fixed duration licensing. Traditionally, there has been a single payment for perpetual use, but we are beginning to see fixed-term licensing and Microsoft is an obvious example of this. Whether this is borne out of a desire to reinforce the license rather than sale point (perhaps in light of US product liability suits?), or simply to boost income, is a discussion that could continue into the small hours. Whatever your viewpoint, it is certainly a challenge for the industry, as demonstrated by Microsoft’s recent delays and its desire to broker deals with major users.

Clearly there is an economic element to this on the part of developers, but Jeremy brought a US case to the audience’s attention from November 2001 – Softman vs Adobe. Here, Softman was bulk-buying bundled software from Adobe and selling the individual programs separately on a Web site. There was no reseller contract in place, Softman had not accepted any EULA and, despite Adobe’s protestations, the court favoured Softman and accepted that they were free to distribute the software they had purchased. Taken together with product liability that would apply to a sale but not a licence, and it becomes clear why large software developers such as Microsoft might be keen to reinforce the licensing point.