4. License Fees and Costs


4. License Fees and Costs

a. License Fees

Software is typically licensed and priced on a specific metric (e.g., enterprise, named users, concurrent users, seats, or devices (see descriptions below)). The scope of the use restrictions that apply to a particular metric will limit the licensee's ability to, and impact the price of expanding use of, the licensed software. Thus, it is important to consider the licensee's future needs regarding the software, and to provide for the licensee's ability to expand use of the software while the licensee's negotiation position is at its strongest (e.g., locking in the fees to add additional users or facilities during, at minimum, the first few years of the license term).

The following are the types of licenses most frequently encountered:

"Enterprise" provides the broadest license, but likely will be extremely expensive because fees are based on the size of the licensee's total "Enterprise." The term "Enterprise" can be defined to apply to a single facility or to all facilities within an organization, but the license will still likely be more expensive then if the fee were calculated using one of the other metrics discussed below. An Enterprise license should be considered for applications that will have broad and frequent use throughout the organization, such as a scheduling program or an E-mail product. For less ubiquitous products, an Enterprise license is still valuable if it can be achieved without paying a significant premium over pricing that is calculated using other metrics. An Enterprise license can also be simulated by simply expanding the definition of "licensee" to include all of licensee's entities (see example revisions to Section 2.1, above).

"Named Users" usually means the total number of specific types of users who are allowed to access the software, regardless of whether or not they are concurrently using the software. In these types of arrangements, the license should include language permitting the licensee to change the names of authorized users on notice to the vendor.

"Concurrent Users" usually means the number of users and devices that can simultaneously access the software. This type of limitation was once very popular but is less common today.

"Seats" usually refer to a total number of unique workstations through which the software can be accessed. The "seats" are paid for regardless of use.

"Devices" usually means the software may only be used on specific hardware devices. If software is licensed for a particular server, a provision should be included permitting the licensee to change the designated server on notice to the Vendor. This is an important right that will insure the licensee's ability to upgrade its equipment and to move the software to a "hot site" in the event of an emergency.

The type of metric used in a particular license will have important cost and scope of use implications. If defined properly, a "Concurrent User" license will generally be more cost effective than a "Named Users" license or a "Seat" based license because the fee is more closely related to actual use. Keep in mind the scope of use restrictions that apply to a particular metric will limit the licensee's ability to use the software, and impact the price of expanding use of the software. It is important to consider future expansion in use of the software at the time the license is negotiated, and to provide for rights to such expansion (and any costs) in the agreement, when the licensee's negotiating position is at its strongest. For example, if there is a concurrent user limitation in the agreement, consider adding language regarding the cost of adding additional users (require discounts if blocks of users are added at the same time). The cost of additional users should be fixed for at least the first few years of the agreement. Thereafter, it may be possible to negotiate a yearly cap on fee increases (e.g., CPI or CPI plus 3–6%) for an additional two to three years.

If any third party software will be provided by the licensor, the licensee should always request copies of the applicable license agreements and specifically inquire whether there are any concurrent user or other limitations on the use of the third party software. It is possible, for example, that despite a broad license being obtained to use the licensor's main product, a scope of use limitation on a critical third party product will act to limit the licensee's overall use of the system. Of course, the licensor should be required to specifically identify any additional fees associated with the third party software in an exhibit to the license agreement.

b. Costs and Expenses

Unqualified statements requiring the licensee to pay all amounts billed by the licensor should be avoided. Invoices are the subject of frequent disputes. Provisions such as the one provided in the vendor form agreement should be modified to include the concept of "disputed payments." In addition, the licensee's time for payment of an invoice should run from the date of receipt of the invoice, not the date the invoice is printed. Several days could lapse between the time the invoice is printed and the date on which it is sent to the licensee. If we add to that delay the time it takes for the licensee to receive the invoice through the mail, a week or more may be lost. This could leave the licensee with little time to process the invoice and send payment to the licensor before interest will start accruing. If the vendor refuses to revise the agreement so that the time for payment runs from receipt of the invoice, the period for payment should be increased to allow for delays in processing and mailing on the vendor's side (e.g., increases the thirty day payment period to forty-five days).

Section 5.4 of the form license shows a common trend in license agreements in which the vendor makes all fees nonrefundable - even if the vendor fails to perform. Licensees should reject all provisions that make payments "non-refundable." Such provisions could literally permit licensors to retain license fees even if they never deliver the purchased software.

Travel and living expenses can quickly accumulate and amount to a significant percentage of the overall fees to be paid under the agreement. Prudent licensees will insist that controls be included in the agreement to require the licensor to obtain the licensee's approval before incurring these types of expenses. In some instances, the licensee may require the licensor to comply with the licensee's corporate travel policy, which may be attached to the agreement as an exhibit. An example travel provision follows:

Example Provision:

start example

Travel and Living Expenses. Unless agreed otherwise, Vendor shall utilize Los Angeles [6] area personnel ("Local Personnel") whenever possible to minimize travel and living expenses incurred. Travel and living expenses charged to Customer under this Agreement shall be consistent with Customer's current Travel and Living Policy, attached as Exhibit "__" (Travel and Living Policy). In particular, all commercial air travel shall be coach class. Receipts or reasonable evidence thereof are required for commercial travel, car rental, parking, and lodging. When Vendor employees visit more than one client on the same trip, the expenses incurred are apportioned in relation to time spent with each client. Vendor shall obtain Customer's prior written approval, which shall not be unreasonably withheld, before incurring any expenses exceeding, in the aggregate, One Thousand Dollars ($1,000.00). Vendor shall use commercially reasonable efforts to make airline reservations sufficiently in advance of the travel date so as to obtain the lowest airfare.

end example

In some states, sales tax can be avoided by requiring the licensor to deliver the software electronically, without any physical media. Most vendors are willing to cooperate in making delivery electronically. Licensees should review the laws of their particular states regarding taxation of software licenses. If this applies in your state, the following provision should be added to the license: "To the extent practicable, the Vendor shall deliver the Licensed Software to Customer by electronic transmission."

c. Overall Cost Control

Vendors have many ways to derive revenue from their license transactions. In many instances, the number of revenue streams that may flow from a particular agreement will be difficult to determine. One of the best ways to ensure the vendor has clearly disclosed all possible fees and costs associated with use of the software is to include language that essentially excludes all fees that are not identified. See the new Section 5.5 provided in the example below.

Example Revision:

start example
  1. Fees and Payment.

    • 5.1 License and Support Fees. Customer shall pay the license, support, and other fees set forth in Exhibit A.

    • 5.2 Taxes. Customer shall pay all federal, state, and local taxes, government fees, and other similar amounts that are levied or imposed on the Charges, this Agreement, or the transactions hereunder, including sales, use, excise, and value added taxes. In no event shall Customer be obligated to pay any tax based on the income of Vendor or its personnel. The Licensed Software shall be delivered to Customer by electronic transmission, without delivery of physical media.

    • 5.3 Travel and Other Expenses. Customer shall reimburse Vendor for all reasonable travel, living, and other out-of-pocket expenses incurred by Vendor personnel in connection with this Agreement. Notwithstanding the foregoing, Vendor shall obtain Customer's prior written approval before incurring any expenses in excess of $______. Customer shall not be responsible for any expenses incurred by Vendor that are not so approved.

    • 5.4 Payment. Unless provided otherwise herein, Customer agrees to pay all undisputed amounts due under this Agreement within thirty (30) days of Customer's receipt of the invoice after the date of invoice. Past due undisputed amounts will bear interest of one and one-half percent (1 1/2%) per month from the due date or the highest rate permitted by law if less. The making of any payment or payments by Customer, or the receipt thereof by Vendor, shall not imply acceptance by Customer of such items or the waiver of any warranties or requirements of this Agreement. All payments made under this Agreement shall be nonrefundable, except as specifically provided otherwise in this Agreement.

    • 5.5 All Fees Stated. Except as specifically provided in this Section 5 and in Exhibit A, there are no other fees or costs to be paid by Customer under this Agreement.

end example

[6]Insert licensee's location.




Software Agreements Line by Line. How to Understand & Change Software Licenses & Contracts to Fit Your Needs
Software Agreements Line by Line. How to Understand & Change Software Licenses & Contracts to Fit Your Needs
ISBN: 1587623692
EAN: N/A
Year: 2004
Pages: 56

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