Careful planning of software license agreements deters disputes - part 2

Healthcare Financial Management, April, 1989 by Michael J. Manfredi, Dan M. Peterson

Careful Planning of software license agreements deters disputes

When a healthcare institution is planning to acquire a software package, it should form a team to investigate vendor options.

Once a vendor has been selected, the team members' central concern is to ensure that the institution obtains all the provisions for which it has bargained.

To negotiate the terms of a software license agreement, the team should focus on four central provisions: scope of use, representations and warranties, acceptance testing, and remedies.

SCOPE OF USE

It is almost always in the vendor's interest to restrict the use of its software as much as possible in any license agreement. By doing so, the vendor creates the possibility of additional license agreements in the future with related parties or of extracting higher license fees later when the need for broader use is recognized.

At the outset of negotiations, therefore, it pays to give some careful thought to how the software will be used. A simple but effective method for guiding these thoughts is to ask "who, what, when, where, and how" questions about the use of the software.

Who will use the software? If the institution is a single corporation, it may be sufficient to name the corporation as the user and leave it at that. Frequently, though, healthcare institutions are part of a larger corporate structure that includes subsidiaries, management corporations, development foundations, and other entities.

A useful approach is to define the word "affiliate" and have that definition include by name all corporations to be covered, together with any corporations in which the institution or its affiliates may later acquire a management, membership, or ownership interest. Successor corporations also should be specified in the event that a reorganization or merger takes place.

What software is covered by the license agreement? It is unlikely that the institution will neglect to specify the existing software packages to be covered by the license agreement. But it is quite easy to neglect to cover upgrades and future releases of the software. These should be expressly included in the license. The institution should be able to obtain upgrades and future releases free or for a specific, negotiated fee.

Also, if new modules or applications that will work with the existing software are to be added in the future, they should be covered by this license agreement as well. The institution's negotiating position will never be stronger, and it may realize substantial dollar savings by contracting for these additional applications now.

When may the software be used? Typically, software licenses are perpetual; that is, they grant a right to use the software forever. But when the right to use the software begins is sometimes more complex.

If the license agreement contains a period for acceptance testing, as it should, the institution should specify when and under what conditions it may use the software prior to formal acceptance. The tension here is between the institution's desire to test the software thoroughly (including testing it under actual operating conditions), and the vendor's desire not to permit its software to be used indefinitely without formal acceptance.

Where may the software be used? Most often, a license agreement limits use of the software to a single computer or central processing unit (CPU). If use on more than one CPU is contemplated, this should be provided for in the license agreement, although an increase in the license fee may be required.

Even if the license agreement is limited to use on a single CPU, the license agreement should nevertheless allow use on another CPU (either on site or at a remote location) to cover specified contingencies. These contingencies might include use on another computer during acceptance testing (if the institution's main computer is tied up running existing software) or if there is a computer hardware failure that requires the software to be transferred to another computer.

How is the software to be used? The vendor will want to limit the software's use to processing the institution's own data. This prevents the institution from using the software for commercial data processing for unrelated entities and thus becoming a competitor of the vendor. That limitation is reasonable, but the definition of the data to be processed should be sufficiently broad to include data from all of the affiliates and related parties that are entitled to use the software.

REPRESENTATIONS

AND WARRANTIES

Representations and warranties are statements or promises by the vendor about the software, or about some other matter pertaining to the licensing of the software. Particular legal consequences--either specified in the contract or arising from case law and statutory requirements--will result if those statements or promises turn out to be false.

There are two types of warranties that are of primary importance when negotiating software licenses--warranties of performance and warranties of ownership and noninfringement.