Co-authors Joel Muchmore and Arthur Beeman, Beeman and Muchmore, LLP
As an integral part of any company’s software asset management, licensees should take the time to understand the important role of vendor software license audits. Far from mere formalities, software license audits are best understood as a quasi-adversarial and (relatively) formal process that is bounded by rights and obligations granted in the governing agreement. For vendors, audits ensure compliance with agreed terms, thereby protecting their intellectual property and preventing misuse. For licensees, audits establish adherence to licensing terms, thereby providing finality and avoiding downstream legal and financial consequences.
The Risks of Software License Audits
At their core, software audits are a process to verify usage of a vendors’ intellectual property in accordance with their governing agreements. While this process doesn’t necessarily have to be contentious, increasingly, some (if not most) vendors are using audits as revenue-generating exercises, at time taking advantage of overly-helpful IT personnel who are willing to indiscriminately provide extraneous information and often inadvertently agree to a vendor’s interpretation of licensing terms.
The best preventive method is for licensees to be aware of their rights and obligations and, armed with this understanding, stand ready to provide no more information than contractually obligated and, when necessary, to dispute findings.
In order to assist licensees, this blog post details licensees’ rights and obligations during an audit, emphasizing understanding and adhering to software license agreements for effective navigation of the audit process and protection of their rights.
Licensee Rights and Obligations During a Software Audit
By and large, the four corners of the license agreement define a licensee’s rights during an audit. That said, there can also be certain rights that a licensee can safely assert even if they are not enumerated with specificity in the agreement. While a licensee should always confirm the terms of provided in the governing agreements, following are a core set of rights a licensee should be prepared to assert in the course of an audit.
Right to Sufficient Notice
This right ensures that the licensee has the proper notice in advance about an upcoming audit. The notice period, often stipulated in the license agreement, allows the licensee to prepare for the audit, ensuring that relevant documentation and software usage records are in order. This preparation helps in minimizing operational disruptions during the audit process.
Right to Avoid Disruption to Business Operations
By their nature, audits are time-consuming and arduous undertakings. Licensees should prepare to demand auditors conduct the audit in a way that does not disrupt their ongoing business operations.
Right to Confidentiality
The licensee’s right to confidentiality protects sensitive business information during the audit. This is particularly crucial when it involves third-party auditors. Companies commonly use non-disclosure agreements (NDAs) to legally bind auditors to confidentiality, ensuring they do not disclose or misuse any proprietary or sensitive information accessed during the audit.
Right to Challenge Findings
If an audit uncovers issues like under-licensing, the licensee has the right to question or dispute these findings. This right is important for ensuring that any claims of non-compliance are accurate and fair. Insisting on this right allows the licensee to present their case or correct any misunderstandings before the vendor imposes any penalties or additional fees.
Right to Limit Scope
The license agreement typically defines the audit scope, and licensees should insist that auditors stick to these predefined boundaries. This right prevents auditors from overreaching or delving into areas not covered by the agreement, thereby protecting the licensee from unnecessary scrutiny or disruption beyond the agreed terms.
Licensee’s Cooperation Obligation
The licensee has an obligation to cooperate with the audit, typically by providing sufficient information for the vendor to measure deployment and usage. This can means providing access to records, software, and personnel as required under the terms of the license agreement. Failure to cooperate can lead to breach of contract allegations and potentially more severe penalties.
Conclusion
Understanding and adhering to the specific terms of the software license agreement is vital for licensees to navigate an audit effectively and protect their rights. In addition to the rights outlined above, we’ve outlined 6 Critical Points of Audit Negotiation and 12 Pro Tips for Navigating a Successful Audit — both of which can help you leverage more ground during your audit without violating your legal obligations.
