Best in Law: The Significant Business Expense of Unlicensed Software

By Glen Price

Software licensing and subscription fees can be a significant business expense, particularly if your business requires specialized or industry-specific software that can cost thousands, or even tens of thousands, of dollars per license — and for which there is very little competition in the market.

Software vendors often include strict user authentication requirements and limitations on the number of authorized users. Even unintentional violations of these terms can have immediate and expensive consequences. Many license agreements allow the vendor to charge you for additional licenses if there is even a single violation of the terms of use and it is often difficult to negotiate any changes in those terms. Accordingly, it is important to understand the types of licenses and what to avoid if possible.

In the past, it was less common for a vendor to detect if software was installed on too many computers or too many users had access at a particular time without an expensive audit, but that has changed. With the popularity of subscription-based licensing models and always-on Internet access and software updates, vendors can easily track software usage.

This can particularly be a problem when employees are working from home or you use temporary workers or independent contractors who may be given access to a software product to perform work for your company. Such workers may use an unlicensed version of that product on a laptop or home PC, violating the license terms even though you have properly purchased the licenses necessary for your business.

If the vendor detects the use of that unlicensed copy, they will charge you for an additional copy, even though you had a licensed copy available for use. If that additional license is $3,000, you may have just lost all the profit on a particular job.

One way to avoid this problem is to make certain that your license or subscription-based model is tied to the number of active users at any given time based on login credentials, and is not dependent on the place of use.

If at all possible, avoid licensing that is dependent on unique installations on a given machine. Also, try to negotiate language that allows for a notification from the vendor when they detect unauthorized use so you can correct the issue. If you can’t negotiate this, then have a policy in place to carefully manage which employees have access to the software and where.

A related and equally important issue is renewal and termination. It is common for licensing and subscription arrangements to auto-renew annually unless notice of non-renewal is given within a fairly short time-frame (usually 30 days).

If you are using new software that you are not familiar with in terms of its performance or the number of copies or subscriptions, you need vary from time to time due to the number of employees you have and needs of your business, make sure that you eliminate auto-renewal and have a fixed term.

If subscription fees are charged on a monthly basis, then your ability to terminate should be monthly as well. Don’t get trapped using software that is not performing well or have more authorized users than you need because you missed a deadline to terminate before renewal.

If you prefer the convenience of auto-renewal and your vendor is open to negotiation, then try to get a termination right that allows you to terminate at any time after renewal and receive a refund of unused license fees. This can be a useful option for both parties, as it makes it more likely you will renew for the vendor, but still gives you some flexibility if changes need to be made later.

This article first appeared in the Orange County Register and other Southern California Newspaper Group publications online on Feb. 23, 2020. Republished with permission.