Modern Software Licensing: New Trends And Options

Lisa AbeNovember 17, 2010

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Modern Software Licensing: New Trends And Options

1. Introduction2. Virtualization, Software Streaming and Cloud Computing3. Data Centre Backup Issues4. Software Shelving 5. Desupport and Tied Selling6. Handling Third Party Products and Open Source

Software7. Pricing Variables

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1. Introduction

• Global or enterprise-wide software licensing infrastructures• Customers sharing licenses and software across

geographically and organizationally fragmented user communities

• Procurement, license management and servicing may or may not be centralized

• Resulting in new licensing, support service and pricing models

• Procurement, reporting and dependency issues• Hard to trace back to order source and keep track of

support user entitlements• Difficult to report accurate license usage• Dependencies create problems when a license expires or

is terminated

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2. Virtualization, Software Streaming and Cloud Computing

• Hardware, servers, desktops and software can be “virtualized”• Software virtualization uses software technologies to

encapsulate applications from the underlying operating system on which they are executed.

• A fully virtualized application is not installed in the traditional sense, although it is still executed as if it is. It is free from physical hardware or the host operating system. The application is fooled at runtime into believing that it is directly interfacing with the original operating system and all the resources managed by it, when in reality it is not.

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Virtualization (cont.)

• In a physical environment, every application depends on its Operating System (OS) for a range of services, including memory allocation, device drivers, and other infrastructure. Old fashioned software required installation of one copy for each OS. Problem was incompatibility, e.g. installing MS Office on Linux

• In a virtual environment, Kernels of the OS are created to interface with the self-contained version of the software, as needed.

• Thus applications can be run independently of an OS, not technically “installed” or “copied” to a hard disk to run them, providing quicker and easier deployment at lower cost and less security risk.

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• Copying generally requires some form of fixation, either permanent or temporary

• In Apple Computer Inc. v. Mackintosh Computers Ltd. [1990]2 S.C.R. 209, the loading of a program into the internal memory of the computer was a reproduction

• Virtualized software is not “loaded” and can operate independently on multiple operating systems

• Pure “use” of or access to software is not an infringing act under Copyright Act

• Impact on license fee structure, e.g. if based on number of copies installed, number of processors running, CPUs, machines, servers, location, etc.

• Risk of copyright infringement or breach of license if exceed the scope of license that contains restrictions on use

Virtualization (cont.)

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Virtualization (cont.)

• Not quite clear at what point in time, if any, a “copy” of the software has been made.

• A “Copy” means the medium on which information is fixed on a temporary or permanent basis and from which it can be perceived, reproduced, used or communicated, either directly or with the aid of a machine or device.

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Software Streaming

• Modern computer programming permits the “streaming” of software code.

• “Application Streaming” means only specific parts of a computer program need to be available at any instance for the end user to perform a particular function.

• This means that a program need not be fully installed on a client computer, but parts of it can be delivered over a low bandwidth network as and when they are required by pulling the application on demand.

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Software Streaming (cont.)

• Could streaming of virtualized software be a “communication to the public by telecommunication”? Might result in infringement of s. 3(1)(f) of the Copyright Act if not properly licensed.

• Also, software streaming might be construed as the “rental” of a computer program, which would infringe s. 3(1)(h) of the Copyright Act if not properly licensed.

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Cloud Computing

• Internet based computing.• Types: public, private (like a utility), community, hybrid.• Virtualized servers, storage, applications, platforms, delivered as a

service.• Similar to an ASP model or software as a service.• May or may not be configurable, scalable, multi-tenant efficient,

customizable.• If software code is delivered to a user, a copy is being made and

hence a license required to avoid infringement under s. 3(1)(a) of the Copyright Act.

• If software functionality (processing capability) is merely being accessed over the cloud, it is more like an outsourced service and a license might not be required.

• Could give rise to similar issues as virtualization or streaming, if software is virtualized over the cloud.

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3. Data Centre Backup Issues

• Licenses for backup copies and disaster recovery use – extra cost

• To ensure a successful restore from backup, you must know what defines a good backup.

• A good backup includes at least the system state and the contents of the system disk. Backing up the system disk ensures that all the required system files and folders are present so you can successfully restore the data.

• Multiple types of backup: normal/full, incremental, differential.

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Data Centre Backup Issues (cont.)

• A Normal/Full Backup creates a backup copy of the entire system state.

• Incremental Backup includes only those files which have been changed or added since the last backup run (regardless of whether this has been an Incremental Backup or a Full Backup).

• Differential Backups create a Full Backup first. After this, only those files which have been changed or added since the last Full Backup will be copied.

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Data Centre Backup Issues (cont.)

• Operating systems have own utilities and tools for automatic backup that compress and copy files.

• Active Directories are backed up as part of system state.• Best performance practice states that the Active Directory's

logs and database files should be on separate disks – cost to license?

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Data Centre Backup Issues (cont.)

• Standard process for businesses to have set up a system restore point; a system restore returns the computer's settings and programs to setup of the computer.

• More than just customer data files, also system files, boot files, etc.

• Entire systems (including hard drive) are copied.• Replicate vs. reinstall.• Multiple concurrent timing and tiers: Daily, weekly, monthly,

annual, forever…

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Data Centre Backup Issues (cont.)

• Backup programs often create a ghost image (compressed files) of the hard drive being backed up to permit replication on restore.

• Redundant servers, continuous, automatic backups – set up by admin, more than once.

• Avoid involuntary breach of licenses with respect to backup and DR.

• Properly define the backup of computers.• Also, watch out for restrictions on backup to tape media –

should be broad enough to cover other media and hard disks used to backup servers.

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4. Software Shelving

• Large vendors providing enterprise wide support for multiple products.

• Opting out of software support and maintenance is not practical since products being licensed in customer-driven complex layers (e.g. by site, user, affiliate, quantity, etc.).

• Vendor/licensor support services provided from central location and answer all calls.

• Bundling of support with software license.• If customer doesn’t purchase annual support, licensor will

terminate “perpetual” license.

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Software Shelving (cont.)

• Licensee cannot have critical perpetual software licenses terminated.

• Termination of licenses also triggers repricing of bulk software purchase agreements.

• Licensee required to pay more for remaining licenses, or risk termination of all software licenses.

• Conflicting interests between licensor managing its business operations effectively and licensee’s needs.

• Anti-competitive issues to be discussed below.

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Software Shelving (cont.)

• Proposed compromise: Software shelving.• Only works if licensee won’t use software without support

anyway.• Licensee has right to “shelve” the operational use of the

software until such time as support is reinstated. License remains truly “perpetual” and is not terminated. Reinstatement of support may result in payment of incremental fee for lost support time and upgrades to most current version.

• Licensee maintains flexibility and control over software implementation and use.

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Software Shelving (cont.)

• Hilight certain situations where cancellation of support and maintenance will not trigger a shelving (or termination of license), e.g. licensor’s breach, force majeure or source code escrow release condition occurs.

• Narrow scope of shelving or termination only to a particular license set vs. entire range of product.

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5. Desupport and Tied Selling

• Beware of anti-trust/competition violations, e.g. § 77 and 79 of the Competition Act:• tied selling, e.g. where a supplier of a product, as a

condition of supplying to a customer the “tying product” (i.e. a product in a market in which the supplier has market power), requires the customer to acquire any other product (the “tied product”) from the supplier or induces the customer to acquire the tied product from the supplier by offering to supply the tying product on more favourable terms or conditions.

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• abuse of dominant position, e.g. where a supplier of a product, as a condition of supplying the product, requires the customer to deal only or primarily in product supplied by the supplier, or induces the customer to deal only or primarily in product supplied by the supplier by offering to supply the product on more favourable terms and conditions.

Desupport and Tied Selling (cont.)

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• exclusive dealing, e.g. where (1) the entity engaged in the tied selling and/or exclusive dealing must have market power in a relevant market, (2) the tied selling and/or exclusive dealing alone or combined with other conduct must amount to a practice of anticompetitive acts, and (3) the practice is likely to prevent or lessen competition substantially in one or more markets.

Desupport and Tied Selling (cont.)

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6. Handling Third Party Products and Open Source Software

• OSS and Third Party software commonly included as large vendor product offering.

• Vendor needs flexibility in business operations to incorporate future third party software and OSS, also as part of M&A activity.

• Customer needs visibility of what products it is getting and which ones are separately licensed, at time of purchase order.

• Customer needs to do due diligence on third party vendors and OSS licenses. Part of procurement process – may require revision to corporate IT policies and practices for consistent dealing across organization with each new order.

• Need to clarify whether OSS and Third Party Software are independent operation/licensing or co-dependent/included in vendor license for vendor software operation.

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Handling Third Party Products and Open Source Software (cont.)• Risk of product listings and terms hidden in online program

documentation (hyperlinked documents), testing materials, or disclosed after purchase.

• Click-wrap, shrink-wrap, documents cross-referencing third party terms, either delivered with software or online.

• Amendments to definitions of “Third Party Software” vs. “Ancillary Software”; with Ancillary Software included in defined term “Licensed Programs” and therefore covered by the terms, warranties and indemnities of the vendor software license (as opposed to a separate third party license).

• Add minimum warranties from vendor that OSS and Third Party software is identified somewhere and it will not reduce the scope of the customer’s license or ownership of IP.

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Handling Third Party Products and Open Source Software (cont.)• Negotiation of master software license terms to apply to all

software purchased from and delivered by the vendor – don’t want terms that we spent ages negotiating to be superceded by extraneous documents.

• Priority and precedence; amendments to Entire Agreement clause.

• Issue of who supports over lifetime of product – can vendor commit to lifetime support?

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7. Pricing Variables

New pricing models based upon:• Number of servers hosting the software (real or virtual)• Number of disks on which software is installed• Number of users accessing software (as opposed to running

copies)• Active use, e.g. software being run (checked out) vs. shelved

(checked in)• Testing vs. production environments• Instances of software operating (real or virtual)• Instances of software reproduced or installed (real or virtual),

even if not operating (e.g. opt out test software)

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Pricing Variables (cont.)

• Redundant systems, types of backup• Hot backup sites vs. cold backup sites• Data backup vs. software/systems backup• Moving away from hold backs for phased in delivery or

acceptance testing• Change of control, control over affiliates• Enterprise wide, multiple software product support

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New Pricing Implications

Resulting in more terms, corporate policies and procedures dealing with:

• Distribution, implementation, managing, monitoring compliance and enforcing

• Audit rights or scripts, security, confidentiality and reporting• Dispute resolution• Complexities around termination, e.g. all the licensed

software vs. only unpaid “parts”• Risk of infringing software IP rights that haven’t been fully

paid for• Use of consultants and certification authorities to improve the

quality of licensing implementations and to educate vendors and licensees

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labe@fasken.com

416-868-3358 www.fasken.com

This presentation contains statements of general principles and not legal opinions and should not be acted upon without first consulting a lawyer who will provide analysis and advice on a specific matter. Fasken Martineau DuMoulin LLP is a limited liability partnership under the laws of Ontario and includes law corporations.