Andrew Crystal and Eliot Henderson cover a significant ruling for software customers and providers, in which the High Court found that Diageo breached the ‘Named User’ pricing mechanism of its software licence agreement with SAP.
The High Court gave judgment in February in SAP UK Ltd v Diageo Great Britain Ltd  EWHC 189 (TCC). The judgment prompts some lessons on licensing and its limits and the drafting of agreements.
Diageo had licensed mySAP Enterprise Resource Planning (ERP) software from SAP since 2004, using its functionality to manage the manufacturing, stock and supply chain, financial reporting and human resources requirements of its business.
Through to November 2015, Diageo paid SAP between £50 million and £61 million in licence and maintenance fees. Pursuant to the Software Licence and Maintenance Agreement between Diageo and SAP (the Agreement), the fees were priced by reference to the number of ‘Named Users’ of the software. Named Users were defined in the Agreement as individuals who are ‘authorised to access the Software directly or indirectly’, depending on their user category as set out in a schedule to the Agreement. The Agreement also granted Diageo a licence to use SAP Exchange Infrastructure (SAP PI), which distributed messages between ERP and other SAP systems. Diageo paid an additional fee to use SAP PI based on the monthly volume of messages processed.
From around 2011, Diageo developed and introduced two new software systems, ‘Connect’ and ‘Gen2’, using a platform provided by Salesforce. Connect enabled Diageo's customers and distributors to place orders for products directly using an online portal, rather than through Diageo employees in a call centre. Gen2 was used to manage the operations of Diageo's sales and services representatives.
Diageo accepted that Gen2 and Connect interacted with the ERP software via the SAP PI system, but disputed whether that interaction constituted use and/or direct or indirect access to the ERP software so as to give rise to the payment of additional fees. SAP claimed that Gen2 and Connect used and/or accessed the ERP software directly or indirectly, without SAP being appropriately compensated under the Named User pricing arrangement. As a result, SAP claimed additional licence and maintenance fees of £54,503,578. The court sided with SAP on liability but did not make a ruling on the amount of compensation due to SAP.
The judgment may embolden SAP and other software providers to pursue further litigation. With that in mind, customers should carefully consider their software usage, or future plans for usage, to ensure that they are not, or will not, be in breach of existing software licence agreements. This is likely to be a particular issue where the customer's software usage has changed over the course of an agreement or is about to change (eg to make use of new technologies). For example, with the Internet of Things now with us and the increasingly prevalent customisation and integration of software, providers should really focus on their licensing arrangements at the outset of new technology projects to ensure they do not inadvertently create a scenario analogous to this case.
When negotiating new contracts, customers should opt for a pricing arrangement which best reflects their actual or intended use of software, paying close attention to definitions like ‘Named User’ (which should be limited if too broad). Customers should also check with their technology teams to understand the likelihood of any ‘indirect’ access (although admittedly in this case the contract was signed when few would have foreseen connecting SaaS applications to on premise application provided by a third party).
Andrew Crystal is a Senior Associate at RPC: www.rpc.co.uk.
Eliot Henderson is a Trainee in the Commercial, Technology and Outsourcing Team at RPC