By: Pam Fulmer of Tactical Law Group and Ryan Triplette of Coalition for Fair Software Licensing

​Software is inherently technical, but its licensing terms do not have to be. On the contrary, it is a best practice for licensing agreements to be clearly written and easy for customers to understand. That is why the first principle of the Principles of Fair Software Licensing is that “Licensing Terms Should Be Clear and Intelligible.”
 
Unclear Licensing Terms Leave Customers Confused and Vulnerable
When licensing terms are not clearly written, customers in the cloud and on-premises are left vulnerable to hidden clauses, stealth or soft audits, and other predatory behaviors.
 
Difficult to find or decipher licensing terms are more common than one might think. The Coalition for Fair Software Licensinghas heard from customers experiencing issues with contract clauses that are not readily apparent or easy to understand. Customers who, despite doing the necessary due diligence prior to signing, are not aware of some of the most important clauses until a problem arises. Given the fact that the only recourse these customers have had to date has been either to purchase products that they do not need or manage litigation, we feel it is important to shine a light on some of these terms
 
For example, Oracle customers who finance their cloud purchases through Oracle Credit Corporation (“OCC”) may not be aware that the standard financing contract allows Oracle to assign the financing agreement to third-party banks.  These customers - generally small and medium sized businesses, including retailers and franchisees - have been surprised to learn that the third-party banks expect to be paid in full on the loan “come hell or high water” even if Oracle itself has completely failed to deliver a working ERP solution. Recently, these banks have filed waves of lawsuits against Oracle customers involving such OCC assignments. Judge Leighton of the Western District of Washington presiding over one such lawsuit noted that the arrangement most likely failed for lack of consideration. According to the court:
 
"[t]his clever arrangement seems designed to subdivide the payment and performance aspects of Oracle's agreement with [its licensee] into different contracts, thus ensuring payment even if Oracle fails to deliver the promised services. The result is a disturbingly imbalanced transaction that preserves OCC's ability to terminate [licensee’s] rights to the cloud services if it fails to pay but denies the [licensee] the same opportunity to avoid payment if Oracle breaches. Unfortunately for Oracle, such an arrangement would likely be illusory or lacking in consideration. See 1 WILLISTON ON CONTRACTS § 4:27 (4th ed.) (contracts are illusory where one party can decide for themselves the nature and extent of performance)." Key Equipment Finance v. Barrett Business Services, Inc., NO. 3:19-cv-05122-RBL, 2019 WL 2491893, (W.D of Washington June 14 2019)."
 
The Coalition has also heard from customers struggling to understand the terms and scope of use of the licenses purchased from legacy providers. This includes customers who are seeking to ensure that they are in compliance with their contractual terms, only to be surprised to learn just what that entails. World-renowned analyst Gartner reported that, “[t]here are also restrictions with the use of Microsoft licensing on Azure itself that are often not communicated to customers. For example, customers are not told about restrictive rules under Azure Hybrid Use Benefits in Azure multi-tenant environments.” The company’s most recent licensing changes have created new layers of complexity for providers and customers alike, with new – but unclear and uncertain – limitations. Many customers have also experienced unexpected costs and extended terms with their licensing terms. Even as customers struggle to understand what this most recent round of changes mean to them, another set potentially sit on the horizon.
 
While these are known and well documented issues that customers are experiencing with their contracts, it is worth noting a few others that have not received much coverage to date.
 
Such is the case of some SAP customers seeking to purchase additional product seats to account for new employees and ensure compliance with existing contracts. What they think will be a (relatively) simple process quickly becomes an opportunity for SAP to force them to re-up the entirety of the underlying contract for an extended term. These customers are finding themselves in a Catch-22 position: either remain in compliance but locked in to a longer term relationship with SAP, limiting their ability to choose alternative vendors that better meet their needs in the future, or risk repercussions for operating out of compliance with their contract.
 
What makes this so interesting - if not disconcerting - is that it is occurring just as many customers are having to navigate increased maintenance fees for their products at the very time they are being forced to evaluate their long term relationship with SAP. It is important to understand these issues as backdrop to recent calls by user groups for SAP, “to offer transparent, flexible and scalable cloud agreements with the corresponding metrics, as well as binding statements and roadmaps for product strategies for cloud and on-premise solutions.” 
 
One final issue that the Coalition has heard from a number of experts raise in recent weeks is another potential round of changes to Microsoft’s Licensing Mobility program that would preclude customers from any avenue of utilizing their licenses on Listed Providers. It is worth noting that the companies included as Listed Providers just happen to be Microsoft’s most significant competitors - but does not provide any clarity as to the reasoning for their inclusion or whether other providers will be included in the future. 

That Microsoft includes itself as a Listed Provider does not level the playing field. Indeed, the Azure Hybrid Benefit essentially exempts Microsoft and its customers from any of the Listed Provider restrictions, as long as those customers use Azure. While it is hard to speak to contractual changes that are, at this point, purely conjectural in nature, the current and potential ramifications for customers already managing the impact of the changes made to the integral software’s licensing terms to date highlights the importance and need for clarity and predictability both for existing and future contracts.
 
Straightforward Licensing Terms Help to Support All Customers, Especially Small and Medium-Sized Businesses
Having clear and intelligible licensing terms empowers customers. This is especially true for smaller businesses that have limited budgets for digital transformation strategies and do not have the means to wage massive legal battles.
 
The threat of expensive and resource-consuming litigation with legacy software providers causes fear among even the most well-financed enterprise customers. Unfortunately, most customers capitulate to unreasonable demands from these providers and end up paying more money than what is owed. Many customers will even agree to purchase products that they do not need to avoid legal action.
Small businesses are particularly vulnerable due to reliance on software providers and often narrow budget margins. For example, Oracle uses its non-contractual partitioning policies during audits to gin up large “shock numbers” for alleged non-compliance involving the customer’s use of VMWare virtualization software, which findings it presents to its customer in final audit reports.  Then Oracle magnanimously agrees to waive the audit penalties based on a provision that is not even in the contract, provided that the customer agrees to enter into a new Unlimited License Agreement (“ULA”) with its pernicious total support stream obligation. The customer then pays more money for software that it doesn’t need or want with expensive continuing maintenance and support obligations, just to resolve an audit based upon inflated audit findings. Such predatory audit practices are detailed extensively in the First Amended Complaint in the Sunrise Firefighters securities class action lawsuit in the Northern District of California.
This is why the Coalition formed – to provide power in knowledge and numbers and advocate for commonsense best practices that put customers, including small businesses, first.

Software Providers Should Adopt the Principles of Fair Software Licensing
Ensuring that licensing terms are clear and intelligible is not just common sense, but imperative at a time when customers need maximum contractual clarity and cloud flexibility to manage the budgetary crunch of the recent economic downturn. However, they are not nearly as common as they should be. Customers should be able to easily access and understand their licensing terms upfront and be able to easily determine their licensing costs and obligations. They should not be forced to click through a series of hyperlinks to just understand simple obligations - let alone critical terms related to payment for non-service, compliance implications, and mobility. It is critical for software providers to stand with their customers and adopt the Principles of Fair Software Licensing, which will encourage other software providers to follow suit.

By Pam Fulmer

​On its website NetSuite, Inc. (“NetSuite), which is now owned by Oracle, touts that its “NetSuite SuiteSuccess is a total solution designed to manage all aspects of a business in a single system” and that “preconfigured, fixed-fee solutions allow customers to go live quickly, in a predicable time frame — and on budget.”  Many NetSuite customers enter into the subscription and professional services agreements with NetSuite believing that they have a fixed price contract, which will not require much of an investment of time or energy on their end to get up and running.  They are wowed by the slick pre-sales presentations and demos, and don’t understand that often the solution that is being touted in these discussions is not the base product, but instead is a solution with all the bells and whistles that may cost significantly more than what is being quoted.  The fact is that the more a prospective customer wants to customize the software to fit its business, the more it will cost and the more time and effort it will take to implement, along with an increased chance of failure.  
 
Oracle appears to be targeting small and medium size businesses with their SuiteSuccess offering.  The Oracle/NetSuite sales team talks a good game, and the prospective customer is led to believe that the solution can be implemented quickly and within the fixed price fee quoted.  Once the customer signs on the dotted line, often it is presented during contract performance with multiple change orders, which increase the total contract price and delays the ultimate “go live” date.  Some customers end up giving up and wanting to terminate the contract and get a refund of monies paid to date.  But given the terms of the standard contract, it is not so easy to get out of it and get a refund of fees paid.
 
So, what steps can companies considering contracting with Oracle take pre-contract to attempt to mitigate the risk in case a dispute with Oracle arises?
 

1. Document in a detailed writing all pre-contract discussions.  NetSuite will not allow prospective customers to record pre-sales pitch meetings.  So instead, it is incumbent on the Oracle customer to take detailed notes of each meeting.  It is very important to identify each participant in the meeting and their title.  Note the time and date of the meeting as well.  If a Powerpoint or other written document is presented at the meeting, ask for a copy.  And write down in detail exactly what representations were made by each member of the NetSuite Sales team identifying the specific statement and who made the representation.  This is important because later down the road if you get into a dispute and NetSuite doesn’t provide the solution that it promised, you can point to specific factual statements that NetSuite made to your company to induce you to enter into the contract, which turned out not to be true.  Be on the lookout for representations that could be construed as mere puffery, which are non-actionable and would not support a fraud claim.  If a representation seems very general, follow-up and ask specific questions and write down the response.  After the meeting review your notes, finalize, and email them to yourself that day.  File the email away in a folder for reference later if a dispute arises.
2. Keep copies of all NetSuite marketing materials that your company relied on in making its decision to go with NetSuite.  Marketing materials, including portions of the NetSuite website and any description of the SuiteSuccess solution could be key to any legal case that you might decide to bring against NetSuite if it fails to deliver on its promises.  With regard to the NetSuite website take screenshots of key portions of the site that you relied upon or print out the entire web page and record the date of the print-out or screenshot.  These materials could end up being very important.
3. Follow-up in writing after the demo with specific questions regarding features that are key to your decision to go with NetSuite and make sure they are included in the total price quoted.  No doubt about it the NetSuite demos are slick and look great.  If you identify key features from the demos that are important to your company and are a big reason that you decide to go with NetSuite, follow-up and request specific written confirmation that the feature is included in the price you are being quoted.  When you get the Estimate Form, ask for confirmation in writing as to where in the Estimate Form that feature is included.
4. Confirm in writing that your NetSuite team will be located in the U.S. if that is important to you.  We are aware that sometimes NetSuite will assign a foreign based team in India or elsewhere rather than a team located in the United States.  This can lead to communication problems.  If it is important to your company to have a U.S. based team, then you will want to confirm in writing with NetSuite that all team members will be based in the United States, and that the U.S. based team is included in the price quoted.
5. Review all contract related documents carefully including Estimate Forms and Professional Services Agreements and download and save all webpages that are URLs or hyperlinks.  As mentioned earlier, Oracle seems to be targeting small and medium sized businesses with their SuiteSuccess offering.  Many such businesses do not have in-house legal departments who are fly specking the agreements, and as a result, the small business owners often miss some important contract related documents.  For example, on the second to last page of the Estimate Form of current SuiteSuccess contract paper, Paragraph A.1 is entitled “Agreement”.  In the second line of the first paragraph there is a hyperlink to a Subscription Services Agreement.  The hyperlink is not set off in a different color or emphasized in any way, and frankly in our opinion seems to be disguised on purpose.  However, if you hover your cursor over the url, the reader will find that it is a hyperlink.  Clicking on that hyperlink will take you to the Oracle website, and with a few more clicks you will end up at the current Subscription Services Agreement (“SSA”).  It is a good idea to match the date of the agreement from the Estimate Form to the footer of the SSA.  If the dates are different, you will need to continue to search the Oracle website to obtain the archived version of the SSA with your date.  The SSA is the Oracle agreement that contains the termination, warranty, term, integration and other key clauses, many of which are one sided and benefit Oracle.  But many NetSuite customers don’t even realize that the agreement is part of the contract, as it is not sent by Oracle as a PDF that the customer needs to execute or agree to like the other documents.  NetSuite customers may have legal arguments under California law that the contract accessed by the hidden hyperlink is unenforceable.  To our knowledge, the issue has not yet been litigated in the context of the NetSuite SuiteSuccess contracts in either California state or federal court.

 
We hope potential NetSuite customers find this blog post useful.  Tactical Law attorneys are experienced with Oracle/NetSuite agreements and assist companies to resolve their disputes with Oracle.
  

In a software licensing case out of the Court of Federal Claims, Senior Judge Edward J. Damich in Bitmanagement Software GMBH v. The United States followed the direction of the Federal Circuit to look at “actual usage” of Plaintiff’s software, and not the cost of a seat license for each installation when awarding damages.  In so doing, the Court rejected Bitmanagement’s arguments that it was entitled to over $155,400,000 in damages and awarded $154,400 in total damages instead.  The court found that 635 users actually used the software and that a hypothetical negotiation would have set the royalty rate at $200.00 per user.  The court then subtracted the number of licenses in the Navy’s entitlement and found that the Navy was 597 users short and awarded damages thereon.
 
The facts of the case were very interesting.  The software was licensed by the Naval Facilities Engineering Command (“NAVFAC”) from a third-party reseller of Bitmanagement called Planet 9 Studios, Inc. (“Planet 9”) and involved “BS Contact Geo” software.  The software enables the visualization of geographic information in third-party hardware and software products and renders realistic terrain and city models and allows a user to position virtual objects using geographic coordinates.  Bitmanagement primarily licenses its software via "PC" or "seat" licenses, which allow one installation of the software onto one computer per license. Each copy of the BS Contact Geo software includes both a desktop executable file ("EXE version") and a web browser plugin file ("OCX version"). The EXE component launches the software as a standalone application whereas the OCX component launches the software within a web browser.  
 
After using the software for a while, the Navy determined that it wanted to put the software on its Intranet instead of loading it on individual computers and wanted more of a “floating license” model.  NAVFAC explained to Planet 9 who then explained to Bitmanagement that Bitmanagement's default licensing scheme was incompatible with the Navy's secure intranet because the Navy could not approve BS Contact Geo if, as was Bitmanagement's normal practice, the end user would be required to contact Bitmanagement for a license key in order to use the program on a particular computer.  Bitmanagement responded that it was "open for any licensing scheme that suits the US Navy better" and was "willing to do [its] utmost to enable [another] licensing functionality, if requested." NAVFAC explained that it needed a copy of BS Contact Geo that included the license key and that was not PC-specific because the Navy did not know "what machine(s) the application will be tested on." NAVFAC also noted that the Navy anticipated needing "an initial 15 licenses, with a potential for as many as 100 or more licenses later on." In response, Bitmanagement, through intermediary Planet 9, provided BS Contact Geo to the Navy with two licensing keys that were not PC specific.  Also in May 2007, at the Navy's request, Bitmanagement provided the Navy with a "silent installer for BS Contact Geo intended for bulk installations," which, Planet 9 explained to Bitmanagement, was "helpful for an administrator to do installations on a large scale even on remote computers connected via intranet or internet."  See Bitmanagement Software GMBH v. United States, 989 F.3d 938, 942 (Fed. Cir. 2021)
 
NAVFAC then engaged in discussions about this new licensing model through Planet 9 who interfaced with Bitmanagement.  Bitmanagement was open to this licensing model and the three companies engaged in detailed discussions.  NAVFAC explained that it had an existing floating license server tracking application, Flexera, that could be used to track BS Contact Geo with no alterations to the program and that Flexera is a server-based program used to limit the number of simultaneous users of a "Flexera enabled"—or "FlexWrapped"—software based on the number of available licenses. When a user opens a FlexWrapped program, the program alerts the Flexera tracking server that the program is in use. The FlexWrapped program sends a similar alert when the program is no longer in use. The Flexera license manager thus theoretically limits the number of users of FlexWrapped software to the number of licenses that a user owns.  Ultimately it was agreed that NAVFAC could use the floating model, but needed to use Flexera, which would control the number of users ensuring that at no time could more users use the software than NAVFAC had licenses for.  The agreement was never completely documented in one license agreement signed by all parties.  However, the parties’ course of conduct demonstrated that all understood the terms of the agreement. Unfortunately for NAVFAC, it did not ultimately use the Flexera software as it had promised Bitmanagement it would do.

In July of 2016 Bitmanagement copyrighted the most recent version of its software and sued the government shortly thereafter.  After a six-day bench trial from April 22-29, 2019, the Claims Court held that the government was not liable for copyright infringement. Specifically, the Claims Court found: (1) Bitmanagement made a prima facie case of copyright infringement; and (2) no express agreement granted the Navy a license to install BS Contact Geo on all of the Navy's computers; but (3) the Navy had met its burden to show that Bitmanagement authorized the Navy to copy BS Contact Geo version 8.001 across the Navy's NMCI network of computers finding an implied license.  Bitmanagement Software GMBH v. United States, 989 F.3d 938, 945 (Fed. Cir. 2021).  Bitmanagement Software GMBH v. United States, 989 F.3d 938, 945 (Fed. Cir. 2021).  
 
Bitmanagement appealed the judgment and the Federal Circuit agreed with the lower court that there was an implied license, but that the implied license required as a condition precedent the implementation of the Flexera software.  When NAVFAC did not meet the condition, it could not claim the protection of the implied license and thereby committed copyright infringement.  The Federal Circuit remanded for the purpose of determining damages.
 
In its opinion the Federal Circuit reasoned that 
 
“[b]ecause Bitmanagement's action is against the government, it is entitled only to "reasonable and entire compensation as damages . . ., including the minimum statutory damages as set forth in section 504(c) of title 17, United States Code." 28 U.S.C. § 1498(b). This amount may not include non-compensatory or punitive damages. Gaylord v. United States, 678 F.3d 1339, 1343 (Fed. Cir. 2012) ("Gaylord I"). Contrary to Bitmanagement's argument, it is not entitled to recover the cost of a seat license for each installation. If Bitmanagement chooses not to pursue statutory damages, the proper measure of damages shall be determined by the Navy's actual usage of BS Contact Geo in excess of the limited usage contemplated by the parties' implied license. That analysis should take the form of a hypothetical negotiation. See Gaylord v. United States, 777 F.3d 1363, 1368-72 (Fed. Cir. 2015).” Bitmanagement Software GMBH v. United States, 989 F.3d 938, 951 n.5 (Fed. Cir. 2021)
 
Upon remand and using a hypothetical negotiation, Judge Damich rejected Bitmanagement’s damages claim for $155,400,000 and awarded damages on the basis of NAVFAC’s actual usage for a total of $154,400.
 
Ultimately the court followed the appellate court’s instruction to look at “actual usage” and rejected Plaintiff’s argument that “use” is equivalent “to the number that were copied onto Navy computers and accessed as well as those that were downloaded and available for use”. Rather than using Plaintiff’s number of 600,000 copies made, the lower court on remand found a total of 635 actual users.  After subtracting the 38 existing Navy licenses, the court found a royalty base of 597 unique unlicensed users.  An amount well short of Bitmanagement’s proposed number.
 
The case is Bitmanagement Software, GMBH v. The United States, Case No. 16-840C-EJD (Court of Federal Claims).