We turn first to the provisions of the relevant license agreement(s), which often are contained in boilerplate paragraphs that software users ignore at their peril.

It is, of course, axiomatic that a dispute over licensing obligations requires an analysis of the license agreement(s) at issue. After all, the license terms establish the vendor’s rights to conduct an audit in the first place, the procedures for doing so and, often, the remedies for any noncompliance that may be discovered. But many software users will find, perhaps to their surprise, that the threshold task of identifying and understanding the relevant terms is itself a challenge.

To begin with, we refer to relevant license “agreement(s)” because, quite often, more than one contract will be involved. The vendor and user may have signed various relevant documents, perhaps dealing with different software components or with later upgrades. Indeed, it is not uncommon for numerous relevant license agreements to have been negotiated over a long period of time—perhaps between the vendor’s and the user’s corporate predecessors and perhaps by persons no longer employed by either of the current parties. Especially if the software is old, critical license terms may even be buried in paper “shrinkwrap” licenses or in text files that have never before received any attention. Further, some vendors’ agreements will refer to still more documents (that, on their face, are not part of any agreement or contract) to determine how use and noncompliance will be evaluated.

If the vendor’s audit and remedy rights do turn out to be a mishmash of contradictory terms contained in different agreements, the vendor’s leverage in an audit dispute will decrease accordingly. After all, the biggest settlement payments happen in cases where one party can throw the other off a cliff, not where both parties will be jumping into an unpredictable swamp. On the other hand, the most sophisticated software vendors will have put in place audit and remedy rights that are both clear and powerful and that are set forth in license terms that have been carefully constructed by an experienced counsel who knows how to turn up the heat.

Increasingly, software vendors will include in their standard license agreements what purports to be a contractual right to charge a noncompliant user an amount determined by the vendor. This language can take several different forms and often uses the passive voice to obscure the fact that the vendor claims a unilateral right to determine the cost of non-compliance. For example, one well-known software vendor provides a standard license agreement that reads: “Licensee will promptly order and pay charges at [the vendor’s] then-current rates associated with i) any deployments in excess of authorizations indicated on or by any annual report or verification; ii) applicable subscription & support services (S&S) for such excess deployments for the lesser of the duration of such excess use or two years; and iii) any additional charges and other liabilities determined as a result of such verification, including but not limited to taxes, duties, and regulatory fees.”

Similarly, another vendor’s agreement provides that “[i]n the event your Use of the Software exceeds your licensed amount, you agree to license from Licensor the necessary amounts and pay any fee associated with such increase.” Finally, some vendors create an arrangement where the parties agree that the fee for any noncompliance—with both noncompliance and the fee determined solely by the vendor — will simply be “invoiced” to the licensee and that failure to pay that amount within 30 days will constitute a breach of the entire licensing regime.

A licensor armed with these or similar provisions might use its purported discretion to declare its “then-current rates,” “any additional charges and other liabilities” and “any fee” to justify a truly stratospheric demand as compensation for alleged noncompliance. In our experience, vendors do not lowball their initial demand for compensation associated with an audit. The numbers can be exorbitant.