In the morass of licensing transactions from 2007 we have noticed some trends that will be relevant to your software license negotiations in 2008.

1. Increased use of the vendor hosted software model. A few years ago, it seemed like the vast majority of software licensing transactions that passed across our desks were traditional software on a disk or downloaded software hosted on the servers of the customer. This year, we saw a significant increase in vendor hosted applications, often referred to as ASP or Application Service Provider arrangements. If you are a software licensee, don’t let the change in business model mean that you give up the warranties, protections and commitments you had in the customer hosted world. One concern is software acceptance provisions. Under the customer hosted model, the fact that on-site installation must occur typically flags the issue of the need to “kick the tires” for a certain period of time. In the ASP world, online demonstrations can make it appear as though software is fully functioning and already at your fingertips. Customers may neglect acceptance provisions as a result. Vendors are also increasingly arguing that an acceptance period prevents them from recognizing revenue at the time of the sale. As a customer, your need for working software should take priority over the vendor’s accounting concerns. We recommend that licensees always push for acceptance provisions in software license agreements.
   
   
2. Alternative pricing. This trend goes somewhat hand-in-hand with the ASP model. In the past, most software transactions were structured such that the user paid a license fee for the software itself and a separate monthly maintenance fee for support and updates. Under the ASP model, license fees are often wrapped into a comprehensive monthly fee making it impossible to use the application without the maintenance program. This may make sense because increasing software complexity reduces the prospect of using the software without a maintenance plan. However, it is important to recognize that paying a monthly license fee for a product should entitle the licensee to a truly dynamic and well supported program. Start your pricing negotiation with a discussion about what portion of the fee is attributable to licensing and what portion is attributable to services. Having this discussion early will increase the likelihood that detailed descriptions of the services will be included in the agreement and not just in the marketing materials.
   
   
3. Reluctance to provide full infringement indemnity. Most software licensees with any bargaining power will demand full intellectual property protection that includes protection against infringement of patents and copyrights and misappropriation of trade secrets. These protections should not be limited by the knowledge of the vendor (thus eliminating the need to perform IP due diligence) and should not be subject to monetary caps that prevent full recovery by the licensee. This past year, many software licensors, purportedly in reaction to the influx of patent trolls, have tried to shift the burden of IP infringement onto the licensee. (Patent trolls are patent holders who never plan to develop the product but instead sue for royalties - i.e. the Blackberry case) From the licensor perspective, the aggressive tactics of the patent trolls present a risk that could throw the licensor’s business model out of balance – losing a major patent case can be a bet-the-company proposition. Licensees, however, should hold their ground on this issue and argue that they have even less control over potential infringement issues than do the licensors.
   
   
4. Open source in the spotlight. 2007 marked a significant year for litigation and developments surrounding open source software (software that includes source code and can be freely modified). In some sense open source was validated when proprietary software company SCO lost its attack on the Linux operating system, one of the most well known open source applications. However, the release of the Free Software Foundation’s new version of the most widely used open source license, the General Public License (GPL) may create confusion in the open source world for 2008. As a software licensee, a good way to start this discussion is to ask for a representation and warranty that the software does not contain any open source code. If the vendor says no, they likely either include open source code, in which case you can evaluate the risk of proceeding, or they are uncomfortable assuring you that their programmers have not accidentally (or intentionally) introduced it, in which case you might consider looking elsewhere.
   
   
5. The death of source code escrows. Okay, they’re not entirely dead, but the trends in favor of vendor hosted applications and the fact that many users have been unable to effectively make escrowed code work, have resulted in a decrease in software escrows. Under a source code escrow arrangement, a third party escrow company holds the software source code for the licensee and releases it to the licensee upon the occurrence of certain events such as bankruptcy or failure to provide software maintenance. Theoretically, access to the source code would allow the licensee to maintain the software themselves. Our experience has been that completing an actual validation test of source code to make it work is difficult if not impossible, so its usefulness as a remedy is questionable. However, for vendors who shudder at the thought of any possibility of their code being released to anyone, source code escrow remains an effective hammer for enforcement of the contract terms. Also, given the above trends, licensees should not always dismiss a source code escrow in a vendor-hosted environment. Source code escrows can be included in an ASP contract.