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If you are reading this article, chances are that you, your law firm or your company have had some experience in purchasing a software license. Software is needed in nearly every business — both big and small — with requirements varying by industry. Hospitals, for example, have vastly different software needs than car manufacturers or call center operations. Whatever your business, you can avoid some common mistakes by following a few simple rules when purchasing software. Rule 1: Understand your needs As the buyer, don’t rely on the software vendor to tell you what software you need and how much. The primary goal of most software makers and resellers is to sell you as much software as they can, while offering as little contractual protection as possible. When you identify a need for software, get your information technology group involved early to help define your solution requirements. If you don’t have your own IT group, consider working with an IT consultant who has specialized knowledge in your field. In addition to functionality and price, there are many other factors to consider. Is the software compatible with your current system? How much customization and implementation work will be necessary? How many licenses do you need? Rule 2: Buy right number of licenses One of the most common mistakes made by licensees is buying too much software. A recent survey showed that only 14 percent of large companies are making full use of the software they license. That means 86 percent of them have at least some “shelfware” — software that gathers dust on the shelf. This problem may be more pronounced in larger companies, where it can be difficult to track the use of hundreds of applications by thousands of people. But small and midsize companies are not immune. How do you avoid the shelfware situation? Plan carefully and take periodic inventories of your company’s actual software usage. If you find that you have shelfware, don’t be afraid to talk to the vendor about trading unused licenses for a credit on maintenance or new software. On the flip side, some companies find that they don’t purchase a sufficient number of licenses to support their usage. This is problematic on several levels. First, if you go back to the vendor with your problem, you may find that you will pay more for the additional licenses than you did for the original ones. Worse, if a vendor audit reveals excess usage, the Business Software Alliance, affectionately known as the software police, may hit you with liability of $150,000 per application. Good planning is critical to avoiding these problems. Look at options for purchasing a site license, enterprise license, or concurrent user license, versus a named user license, as these options may be better suited to your business needs. Also make sure your license is defined appropriately in terms of geography and permitted use. Many standard vendor agreements restrict software usage to the United States. If you need usage rights in other countries, you must negotiate them. Also, most vendor agreements say that the licensee will use the software only for internal business purposes. This may or may not be sufficient, depending on how your organization intends to use the software. If you need to make the software accessible to your customers as part of your business, you must negotiate the proper license scope. If you don’t catch these kinds of issues upfront, the vendor is likely to charge a hefty sum to make the modification later. Worse yet, the vendor may be unable or unwilling to grant the desired rights. Rule 3: Control maintenance costs Software maintenance and support is often the most profitable part of the vendor’s business. If you focus on maintenance costs early in the negotiating process, rather than waiting until the end of negotiations, or worse, until after the software has been licensed, you are likely to get a lower price. Think ahead to future years. Vendors often lure the unsuspecting customer with free or discounted first-year maintenance, but after that maintenance is charged at the vendor’s current rate. Negotiating a cap on maintenance fee increases is a good way to control future costs. Also, get a commitment from the vendor to support the licensed product for a minimum period. Rule 4: Get meaningful warranty The standard vendor warranty typically says that the software product will perform in accordance with the vendor’s documentation. Often, this is insufficient to protect the licensee. Rather than tying the performance warranty to the vendor’s documentation alone, it is best to make the licensee’s specifications part of the contract. The license agreement should provide reasonable acceptance testing procedures so you can verify that the software works as advertised. You should seek assurances that the software will not contain viruses or other harmful code. Depending on the nature of the product and your intended use, there are numerous other warranty protections to consider. For example, hospitals may want a warranty that the software complies with the Health Insurance Portability and Accountability Act of 1996. Rule 5: Negotiate liability limitations Even if you negotiate the best of warranties, other provisions in the agreement may limit your remedies and ability to recover actual damages caused by the vendor or the licensed software. Limitation of liability and exclusive remedy clauses are the chief culprits. While you may not get the vendor to remove all limitations, there are some obligations for which the vendor’s liability should not be limited, such as breach of confidentiality and third-party infringement claims. An experienced attorney can guide you through the negotiating process and identify potential landmines in the contract. Brad Fischer is a senior counsel Foley & Lardner (www.foley.com) in Tampa, Fla. He represents publicly held and private companies in software and technology licensing, outsourcing, joint ventures, mergers and acquisitions, and other corporate and technology-related transactions. He can be reached at [email protected]. If you are interested in submitting an article to law.com, please click here for our submission guidelines.

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