Mellisa D. Maxwell
Published January 2022
The way in which business software is bought and sold is shifting. This shift is resulting in a much higher volume of software licenses than most corporate and business attorneys have historically handled. Many business lawyers will need to adapt their practice style to provide competent representation that meets the needs of the client. When you think about the direct-to-consumer side of licensing, it started shifting years ago.
While many of us remember going to the store to buy a computer game or a movie, streaming and downloading content is now virtually at the fingertips of every consumer. Literally, at the touch of my thumbprint the collected works of Harry Potter is available to me almost instantaneously. Many consumers have come to expect this type of convenience. No matter how much we resisted, last year the access to Instacart, DoorDash, Netflix, Disney+, and many other online services was how many people kept their sanity. Did anyone read the End User License Agreements (EULAs) to those services? Likely not. We were all ready and willing to assume any and all risks for the sake of convenience and the hope of at least a half-second of peace and quiet.
That changes when we step in the office. If a client comes to you and says, “Hey, so we want to get this really cool tool that will help us [fill in the blank], it’s a free trial and then like only a couple hundred dollars a year,” the lawyer brain kicks into motion. Outwardly we smile and say, “tell me more.”
The buying and selling of software
Even though I am using the terms buying and selling, it is important to note that software is not really “sold” in the legal sense. Computer software falls under the original works of authorship protected under copyright law. As a form of intellectual property, software is technically licensed as opposed to sold. 1 What is being bought and sold is just the license to use the software.2
Business to Business (B2B) refers to when one business supplies products and services to another business, as opposed directly to end consumers. Many companies, for example Microsoft, have both models. You may have a Microsoft account for your home computer but when you buy Microsoft for work, you should not be logging into the Microsoft home edition. In the simplest form the B2B license grant is for a commercial use, whereas Business to Consumer applications (B2C) applications will contain a license grant restricted only to personal use.
High-volume licensing models
Arguably, software licensing changed starting as early as the 1990s with ProCD, Inc. v. Zeidenberg, when the Seventh Circuit held the “shrink wrap” license was valid and enforceable.3
But it was not until 2009 when we saw a digital transformation begin to take place with cloud computing. As late as 2011, enterprise level business had hesitation in moving to the cloud despite the enormous cost savings it promised.4 During this time licensors were trying to figure out how to embrace the cloud for distribution as there were key advantages, whereas licensees were working to keep everything stored locally on their own servers and networks, aka “on-prem.” The loss of physical control of the data posed potential risks many businesses were not ready to assume. Now, ten years later, a small company may have over 100 cloud-based applications it is using day-to-day.5
Cloud Marketplaces are a newish B2B channel that allows business leaders a streamlined way to find and purchase cloud applications.6 The question this poses is how can counsel serve the best needs of the client when clients are able to click and subscribe to Software as a Service (SaaS) tools at a rapid pace. Moreover, there is an increasingly growing range of application possibilities from publishing tools, security applications, point of sale (POS) systems, or even Git repositories. 7 The average B2B SaaS sales cycle length can take almost 4 months with some closer to 7.8 One report shows the average in 2020 as 83 days.9 This means there is a business or licensee that needs or wants to buy something and a seller or licensor who is trying to generate revenue.
Imagine the frustration this would cause today’s consumers if it took 83 days to download the next season of Schitt’s Creek. Better yet, imagine a customer walks into a bakery to buy a loaf of bread. Suddenly the stereotypical lawyers swoop in to negotiate this deal—what if the bread is stale? How long will the bread last? What if it makes the purchaser sick? Or a family member? Did they steal this bread? Do they have relevant licenses to sell me this bread? If my client commits to buying more bread, will I get a better deal? Do they have insurance . . .? While the lawyers are trying to craft language on indemnification and remedies in the event of a misrepresentation as to the gluten, sugar, and carb ratio, the lawyers have failed to notice that the buyer and seller have snuck out back to conclude the transaction and move the growing line along.
In this example, the seller wants to make money from selling bread and the buyer just wants to make a sandwich. The lawyer’s zealous advocacy may have just crossed the line to not helping the client but instead is hindering the client’s objectives (and creating risk because we have no idea what was agreed to in this back-alley deal).10 Even though bread and widgets are different from software, it is still the same problem—when the legal department is a roadblock to a deal that has already taken months, it incentivizes our clients to avoid us. The practice style that has worked for legal teams previously is not scalable when the SaaS deals are stacking up. Nevertheless, there are things we can do. Here are five tips to successfully handle a high volume of software licenses.
Tailor your approach
Here is a scenario: it is late in the day and I get an instant message on my computer via Slack from a company executive, “Hey, let’s talk about EULA’s.” Soon we are face to face in a Zoom meeting discussing a potential revamp of the standard EULA template. As we discuss the use case and some of the contractual provisions, I propose a novel approach, “we could modify it to start with something more reasonable.” My colleague’s response is filled with mixed emotions because in his experience, the other side’s legal team will always push for something regardless of whether the starting point is reasonable or not; and then where do you go on the negotiation. It is a good point but it is a time-consuming dance.
Unlike in a B2C relationship, the other side will likely have an attorney or sophisticated procurement person. When drafting and creating standard templates think about how you can advocate for your client but not do it a disservice by impeding business. If you know that you would never ever agree to something, then do not put it in your own template and expect the other side to accept it. When you try to be clever and tricky, you end up being a roadblock.
If your client is licensing out a product then you should be able to have a standard agreement. If your approach is reasonable, then there is a greater chance that your customer agreements will be very much the same and thus lower overhead in managing or tracking contractual obligations. There is a reason DIY legal services exist; we are ruining our profession by getting in our own way.
Know your client
When I look to outside counsel for help, I do not want a generic memo. I want contextual advice, which comes from having a much bigger picture of the company than simply what the company does. Legal counsel should know the market and the industry. Business leaders have business decisions to make; my legal team should be delivering practical and meaningful advice based on business realities. It is not a one-size-fits-all analysis when thinking about a software license. It is very clear when an attorney in a negotiation does not know their client. One of the most over the top examples that comes to mind is a recent situation where the licensor’s attorney insisted on only offering a warranty for something they were not providing; it got really awkward when his client’s business team had to explain what it was that they “do” to their own legal counsel.11
Understand the deal
This ties closely with knowing your client. Make sure your client has provided you with all the documents related for the deal. Often times, there are details in order forms or addendums that you need to have a complete picture. If, for example, a document keeps referencing something that you cannot find, it could be sloppy drafting, but it could also be that you were not provided with all the documents.
Before you even start reading, you should have some idea as to what the software is, who will be using it, and how will it be used. Having some context is crucial to the analysis of the contractual provisions. Moreover, when it comes to contractual provisions, the provisions should all make sense in light of the deal. None of us should have to make those crazy arguments to keep a provision that has been in a template because your boss has not approved a revision in decades—Code Escrow, I am looking at you!12
Read the documents. Do not just jump on a call to negotiate a deal without having read the contract. It is obvious to your clients and the other side that you are winging it. I know sometimes that is not always possible to read the most recent redline you received hours before. I get it. But own it and be honest. Ask the client/business owner to reschedule. If you are outside counsel, there should be no reason you have not read the documents prior to the call, since they are often scheduled based on your availability. Conversely, if you want less to read or want to read faster, then consider using plain language and shorter contracts. Some legal departments try to get get out of reading by forcing its own paper on licensors. This can be a risky approach given drafting a contract that is so generic to cover a wide variety of applications gets extremely long. The longer the contract, the more ripe it is for ambiguity and conflicting provisions.
In addition, while this may make it easier on your operations to not have to read every deal that comes in, it is harder on the licensor’s operations.13 It all falls apart when the client really needs something, and the vendor refuses to license their product under someone else’s paper. By the time the legal team gives in, they are rushing through the license agreement because the client needed this application weeks ago. They are now doing a bigger disservice to their client because they are left negotiating up against the clock with very little leverage. This is where I have found the Marketplace standard contracts really help as a good compromise to move deals through the pipeline.
Do not fear “The Google”. I was very reluctant to use Google Docs. Not too long ago I would have died on that hill to have my windows laptop and my Microsoft applications. Unfortunately, that conflicted with the inclusive culture I was trying to build in the company and across departments. Yes, my team does still have some Microsoft applications that we use.
With a Google Doc you can set permissions and settings to continue to protect confidential information and restrict who has access and versioning visibility. I use it to collaborate with my co-workers because it avoids the version control issues with someone making a change and then the wrong document being sent to the other party. It was a big change at first, but I found it speeds things up.
Initium Law also moved to using the Gsuite application, as we found many of our small businesses clients did not use Microsoft tools, so we spent more time trying to open up each other’s documents than getting anything else done. We also discovered value in having multiple people working on a client matter meant we did not lose any of the work product as they filtered in and out of rotation. It was also a much easier time adding and deactivating credentials. Working together on a document in real time is more efficient than the save, send, open, resave cycle.
I am not endorsing any particular tool or product. There are a number of real time collaboration tools out there. Do not be afraid to use them. I encourage you to proactively evaluate your tech stack and re-evaluate often. The legal tech stack does not have to only include software specifically designated for legal teams; Tackle.io is a great example. Another example is project management; if every department uses one tool for projects but the legal department’s workflow is managed through another tool, it creates friction in the organization. This friction adds to the roadblock perception.
Perhaps it is the fear of change that is the real problem when it comes to embracing technology. Pre-pandemic, many legal departments had not even embraced e-signing tools yet. I have signed roughly 350 documents in Docusign in the past six months and plenty more through other e-sign platforms. Yet a majority of our outbound licensing goes through the Marketplace and is licensed under a click-wrap agreement. I cannot imagine how much I would spend on licensing e-signing platforms if we signed every license agreement.
Besides the budget savings, the cool thing about the Marketplace is the tracking and recordkeeping functionality it provides. It would be remiss of me not to mention the Tackle.io platform in this context. At Tackle we use our own tool internally so we do not have to pull reports from each Marketplace, and we can get the combined data through the Tackle Platform. The more standard the license agreements are, the more capital efficient my department can be. This is why we have built it into our procurement process that we buy from the Marketplaces whenever possible. If the company is leveraging the standard contract for the marketplace, it is the same terms we are comfortable with as the licensor, and we know what to expect.14
The bottom line is that if you keep sending Word docs to clients who do not have Microsoft tools, it leaves the impression that you are stagnant in your practice and have no interest in being a partner to them.
When we adapt and be more innovative, it shows our clients that we really are teachable, and we care what is in their best interest. It is crucial that we are not seen as a roadblock but instead as a valuable partner so that when our representation, advice, and skill matter most, they will trust us. In the end this serves not just our clients but the profession as well.
Mellisa D. Maxwell currently serves as General Counsel at Tackle.io. A a seasoned entrepreneur and transactional attorney, Mellisa has spent the last 20 years guiding executive leaders in multiple areas of business operations. Her love of technology and business drove her initial legal focus in intellectual property and privacy. Mellisa is an active mentor to community start-ups and emerging professionals. When she’s not volunteering at Initium Law where she currently serves as the Executive Director, she is in the mountains with her rescue pups.
1 When software or other Intellectual property is “sold,” it is a transfer of intellectual property rights, which is outside the scope of this article.
2 This is a simplified statement as the license grant language will vary depending on the type of IP rights; use is just one of the rights in the overall bundle.
3 ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996).
4 Cloud Computing- Business Perspective, S. Marston et al, Decision Support Systems 51 (2011).
5 https://www.blissfully.com/blog/saas-statistics/ (last visited Sept. 30, 2021).
6. https://www.canalys.com/insights/Cloud-marketplaces-as-a-channel-to-market?ctid=2232-fded5e8d7060d55ce58f3080ad95e39f (last visited Sept. 30, 2021).
7. A git is the version control system for source code during a software development project.
8. https://www.marketingcharts.com/customer-centric/lead-generation-and-management-107203 (last visited Sept. 30, 2021).
9. https://www.klipfolio.com/metrics/sales/sales-cycle-length (last visited Sept. 30, 2021).
10. If you walked up to the bakery counter to buy a loaf of bread and the clerk says, “hold on, let me get my lawyer on the phone,” run away. Do not buy that bread. Alternatively, if you want to buy all the existing bread and the exclusive rights to future bread, then that is a different story.
11. Do not be pointing fingers, in this situation it was not an Idaho attorney or Idaho company.
12. Previous concerns like escrow for the code, destruction of equipment, and updates to code are gone with the shift to continuous deployment on the cloud.
13. The Marketplaces allow you to use your own EULA as well.