2010

Yearly Archives

  • SaaS Revenue Recognition (boy, these rules are different)

    While I know a little bit about SAAS accounting issues, there are people that know a lot more about it. I ran into Jay Howell (from BDO Seidman) at a recent SAAS seminar I presented at (regarding SAAS contracts) in Washington DC (he is the technical guru on SAAS issues at BDO), and I thought I would share some of his presentations and materials (really good stuff for you SAAS accounting/finance types). Any SAAS business should have the right person look at this, especially as these new rules took effect on June 15, 2010.

    Before I give you the links, I thought I would share a few points that resonated with me.

    1) SAAS Accounting Rules are Different. Yes, these rules are very different (like comparing an apple to an orange) from the typical rules regarding software accounting and revenue recognition (different rules and different interpretations). Don’t think of them as similar at all. (see page 6 of his presentation)

    2) Less VSOE Proof Requirements. The good news is the SAAS accounting rules are less stringent on the requirements regarding VSOE, so this creates some additional flexibility for the SAAS model. (see page 8 of his presentation) Here is a definition of VSOE if you have not heard of it beforeNote to self: figure out how to use this flexibility.

    3) More Flexibility in Sharing Your Roadmap with SAAS Customers. Typically if a software licensing company commits or says too much about …

  • Reverse Engineering Software

    Reverse Engineering Software for Interoperability – LAW UPDATE July 2010

    This is a hot issue, so whether you have a software EULA or SAAS contract protecting your software, you may want to learn more about reverse engineering and its legality (i.e. looking under the hood). In essence, most software and SAAS contracts specifically state that the user is prohibited from reverse engineering the software; by the way, this is something that should be addressed in the contract as copyright law does not provide this type of protection. There have historically been no real exceptions to the contractual prohibition on reverse engineering, but in the past decade or so there has been some changes or erosion to this protection (depending on your perspective).

    1) Law Update July 2010 (iPhone Reverse Engineering for Interoperability):  Actually the Library of Congress added some new exemptions (on July 26, 2010) to the Digital Millennium Copyright Act, which originally provided that it was illegal to circumvent technological measures that effectively controlled access to a work (even if you were reverse engineering to make your product work with theirs).

    • The exemptions are (I am paraphrasing here) (a) getting around access controls to enable an owner of a smart-phone to access software apps on the smart-phone that were independently created (i.e. apps not in the Apple app store), and (b) getting around access controls to enable an owner of a smart-phone to access another network (i.e. using an iPhone with another carrier). [US Copyright
  • Collecting Sales Tax on Software

    3 PRACTICAL Things to Remember About Collecting Sales Tax on Software

    Ok this is a complex issue, but let me see if I can put together a few practical things to remember (at least from the perspective of a software attorney).

    1) This is a State Law Issue. You really have to look at the rules on a state-by-state basis.

    • Some states don’t tax software and others do (example, NY);
    • Some states only tax off-the-shelf software but not custom software (example, WI); and
    • Some states tax the software if you send a CD/media but not if it is downloaded from the Internet (example, CA).

    Takeaway: Figure out where your customers are, and then look at that state’s sales and use tax law. I wish there was a website with a chart of which states require you to collect sales tax for software license sales, but I have not found it yet… if it even exists.

    2) Don’t Kick the Can Down the Road. I have seen too many software companies say I will deal with this down the road, but then find out it is really difficult and expensive to fix later. Think about it this way, you are supposed to collect and remit the sales tax to the state taxing authority, but if you don’t you are still liable for the sales tax. It is really difficult and kinda of embarrassing, to call up your …

  • Installed (not used) or Purchased Licenses

    Installed (not used) or Purchased Licenses. Which One Does a Customer Owe You $ For?

    While most customers may say they only want to pay for software eula licenses they use (not all installed), a recent reported case involving the Los Angeles County Sheriff’s Office says they need to pay for what is installed (even if they are never used). Without going into a lot of detail, the court ruled that LA County Sheriff’s Office must pay the software vendor for the licenses installed (in the amount of $210,000), even if they were not used. Plus, the court awarded the software vendor more than twice the damages award in attorney’s fees and costs (nearly $560,000).

    QSo what is the right way to use a case like this?

    A: This is a great case to educate your customers about, if they are installing a lot of your software and saying they don’t have to pay for those copies as they are not being used. I am not saying hit them over the head with this case or rub their noses in it, but educating them on your perspective is a huge part of software negotiations.

    The goal here is not to go to court, but to me if a customer’s license ends, then the customer should return or destroy all copies of the software (just as the license agreement states). In addition, well run IT departments should not leave  unlicensed copies of software on computers …

  • Is Your Agreement a Plain English SaaS Agreement?

    Ok as a software attorney, what I am asking are your agreements simple or complex (hey, maybe even a plain English SaaS Agreement)? Have you thought about it? I find that most companies don’t really think about these kind of issues (or at least if they do, it is on the bottom of their list). Let me see if I can add this to your to do list, or help move it up the list.

    Step 1: SaaS Agreement. Your SaaS agreement should be super simple. What I mean is, your agreement should be vetted internally to make sure it is (a) written in plain English (get the legal jargon out), (b)  only includes the necessary clauses (talk to your attorney about this, as too often there are clauses in there you may not need or actualy want), and (c) as short as possible. If you have not taken this on, then do it. You will find that it is well worth the effort.

    Step 2: Negotiating Process. How are your sales teams handling the negotiation of your SaaS agreements? Have they thought through the legal and business issues (are they trained on how to respond to questions from end users and channel partners)? If the answer is yes, then great, you are probably getting your deals closed in a reasonable amount of time and building trust with your end users and partners, but if not then you have some work to do. Have your teams read ‘Getting

  • 3 Privacy Tips for a Software or SaaS Company

    3 Privacy Tips for a Software or SaaS Company(Courtesy of the US Supreme Court in 2010)

    Well, while the US Supreme Court in its decision in the case of City of Ontario vs. Quon (June 17, 2010)–an employee privacy expectation case (actually, a sexting case involving a SWAT officer)–intentionally tried not to provide a lot of specific guidance, there are some take aways.

    1) Computer/Technology Usage Policies Matter. The US Supreme Court seemed to make a big deal about the fact that that the computer policy in this situation was clearly communicated, as were changes to the policy (i.e. its applicability to text messages). Note to Self: Create policy and make sure we communicate material changes to all employees.

    2) Intent of the Search Matters.  In this instance, the employer initially performed the search to see if there was excessive use by the employee of the employer owned device (pager), as the employee was footing part of the bill. The court seemed to like the fact that the initial intent was related to the proper allocation of expenses between the employee and the government, so why the search is being performed is a big deal. Note to Self: Make sure that we have the right people involved in deciding on when and how to perform any type of employee data search (i.e. so that the search is performed for the right reasons and in the right way).

    3) Managers Shouldn’t Try to Change Written Company

  • Software or SaaS Company Copyrights!

    Everything a Software or SaaS Company Needs to Know About Copyrights!

    Ok, maybe not everything, but as a software copyright attorney I suggest that you read these five blog posts if you run a Software, SAAS or IT company. Let me summarize why.

    First, you need to know how copyright fits in with other intellectual property.

    – What is Intellectual Property?

    Second, you should understand the basics of copyright law.

    – 4 Things to Remember About Copyright Law.

    Third, you should think through the benefits of registering your copyrights.

    – 4 GREAT Reasons to Register Your Software for Copyright Protection.

    Fourth, is it worth trying to obtain copyright protection for your software’s GUI?

    – Can You Obtain Copyright Protection for Your Software’s GUI?

    Fifth, do you know the difference between copyright and contract protection?

    – Contracts vs. Copyright Protection. What is the Difference?

    If you make it through these five, you should have a good sense of some of basics and important issues to consider regarding copyrights.

    Great job! Class dismissed.

    Legal Disclaimer:

    This is for informational and educational purposes only, and is not legal advice.

  • Contract or Policy?

    Contract or Policy?

    Which One Does a Software Company Need and When!

    While this is a complex issue (like many legal issues), from the perspective of a software and SAAS attorney, I think there are some practical tips to remember when thinking about when to use policies and when to use contracts.

    FIRST, THE DEFINITIONS. Policies are generally defined as a set of basic principles and guidelines, formulated and enforced by the governing body of an organization, to direct and limit its actions in pursuit of long term goals (i.e. soft commitments).  Contracts are generally defined as a voluntary, deliberate, and legally enforceable (binding) agreement between two or more parties (i.e. hard commitments).

    SECOND, 3 TIPS TO REMEMBER!

    1) When to Use a Policy. Policies communicate how you plan to operate your business (whether internally or externally), and you can generally change them at any time. However, if you change them you need to think about if you need to notify/inform the groups impacted by the policy change (not necessary their approval for the change, but simply notifying them of the change). Also, remember that courts generally look at written policies as a form of a commitment, and don’t like it when a company violates its policies.

    Examples: Internal (HR, IT, and Sales Compensation Policies) and External (Support and Privacy Policies). I recommend that you notify all the impacted customers, employees, etc. if possible of material changes to those policies. It is pretty hard …

  • Register Your Software for Copyright Protection!

    4 GREAT Reasons to Register Your Software for Copyright Protection!

    Most people may not realize that there are 4 GREAT reasons to register your software for copyright protection with the US Copyright Office.  As a software copyright attorney or lawyer, I recommend this for every software based company, whether you are licensing your software or providing it as a service.  So here goes.

    1) EASYIt can be done by yourself or with the help of a software copyright attorney. Your call, but any good lawyer will tell you to consult with a software copyright attorney before you file.  In general though, it is not hard to file for copyright protection, so this is not an issue.

    2) INEXPENSIVEThe filing fee is low (less than $100) so that is not a barrier either.

    3) REIMBURSEMENT OF ATTORNEY’S FEES.  If you file a claim for infringement based on a registered copyright that existed before the infringement, federal copyright law provides that you could be reimbursed for your attorney’s fees. If you think about it, this is really a big deal, as it is extremely rare that plaintiffs in a case are reimbursed for their attorneys fees. This can be a double edged sword though, as if you lose you may be paying for the defendant’s attorney’s fees (i.e. something to definitely discuss with your lawyer before you file the case). To have a shot at being reimbursed for your attorney’s fees though, you need to file …

  • 5 Things to Remember in Your Software Development Agreement.

    Hiring an Offshore Software Developer?

    5 Things to Remember in Your Software Development Agreement.

    As a software attorney, I think there are a few practical things to think about when using an offshore software developer/outsourcing software development, and negotiating the software development agreement. As you know, this has become commonplace, even for smaller Software, SAAS and IT services companies. Here are a few thoughts, from a software attorney.

    1. Ownership Rights. While I am sure you saw this issue coming, make sure you document it very clearly, and address ‘work for hire’ copyright, pre-existing code, open source licensing, patent issues, etc. There is a lot to think about so dig in and get it right.
    2. Termination Rights. Think about it, you know that this relationship will not go on forever, so the termination rights in the contract will be exercised (relatively soon). I would spend a fair amount of time with your software lawyer detailing what happens upon termination and how your property is returned to you (hardware, software, etc). Also, I suggest you should be able to terminate (without cause) on much shorter notice than the service provider, so think about that practical issue too.
    3. Gap between Expectations and the Contract/SOW. While this is not purely a legal issue, in a way it is the most important issue.  One of the main purposes of a contract is to communicate and outline which party is responsible for what and when. Take ownership of these important details, and don’t delegate this to
  • Software’s Graphical User Interface (GUI)

    Can You Obtain Copyright Protection for Your Software’s Graphical User Interface (GUI)?

    As a software copyright attorney/lawyer, I think every Software, SAAS or Cloud company should think about this issue, even though this is a complex legal issue.

    Think about it. Most software companies know that they can obtain copyright protection for their source code, but what about their GUI? Well it depends (as any good lawyer would say).

    The BASICS of Copyright Law in Relation to GUIs

    1)  Expressions are Protected, but Not Ideas. The ideas contained in a GUI layout will not receive copyright protection, but if there is a unique expression of an idea then there may be some protection.

    2) An ‘Artistic’ Layout Should Receive Protection, but ‘Features’ Won’t. If there is only one way to express an idea (say a drop down menu list with Save and Print), then that drop down menu will likely not receive copyright protection. However, if the drop down menu can be expressed in a more artistic manner, then copyright protection could attach. This is a hot legal issue, and a February 2010 Federal court just ruled in a copyright GUI case that the artistic and original nature of a CAD software’s GUI design (look of the icons, layout of the toolbar, etc.) provided copyright protection.

    Microsoft Office’s New Ribbon. Haven’t you wondered why Microsoft made that dramatic change to Word, Excel, etc. to the new ribbon layout in Office 2007? I did, and I think that part of …

  • Software EULA or Software as a Service Agreement

    What Does Your Software EULA or Software as a Service Agreement Say About Your Company?

    Interesting question. When a software, software as a service or other IT company sends its written software EULA or software as a service agreement to the customer as part of closing a deal, it is really telegraphing a message about the company and its sophistication. As a software copyright attorney, I actually think about this stuff.

    The wrong message/impression would be:

    1. Is this company for real?
    2. This contract seems too complex?
    3. I don’t understand what they are providing and what we are responsible for?
    4. I need to send this to the legal department or to outside counsel?
    5. I will read this later; maybe on Friday.
    6. It looks like they bought this on the web for $29.
    7. I think they wrote it themselves.
    8. I am not sure this company knows what they are doing?
    9. Is this their first sale?

    None of those messages/impressions would be a good thing or help the agreement move through the process.

     

    Here is what your EULA,  SAAS contract should be telegraphing about your company.

    1.They are serious about this!
    2. I understand their pricing/licensing/services model. It is very simple.
    3. They seem to be transparent about the way they work and their revenue model.
    4. Looks like they know what they are doing.
    5. I bet they sell a lot of this stuff.
    6. Looks like they have …

  • SaaS Agreement vs. Software EULA. Which Template Do I Need?

    As a SAAS lawyer, I sometimes run into the issue of “Do I need a Software as a Service Subscription Services Agreement (SAAS Agreement) or Software EULA?”  In other words, what should I start with (software EULA template, or SAAS license agreement template). It is pretty easy, as it all depends on the primary item provided. Let me explain.

    If a company is trying to define their model in their end user agreement and are unsure of the form agreement to start with, they should figure out if there is any software downloaded by the users, or if they are only providing software-as-a-service through a browser. While many companies have hybrids (some services and some downloaded software) I think it should be viewed as what is the company primarily providing.

    • If they are primarily providing software through a browser, but there is some software downloaded (think Go-to-Meeting or Webex), then they would need a Subscription Services Agreement, as they really are in the SAAS business.
    • However, if they are primarily providing software which will be downloaded, but there are some services provided (maybe support/maintenance/training/some services through the web), then they would need an EULA, as they are licensing their software.
    • Also, some models may be more of a true hybrid, with a SAAS agreement for their online subscription service, and then a EULA for the software that will be downloaded and used with the subscription service..

    Every software based company should figure out which form of …

  • SaaS Agreement Revenue Recognition Issues.

    From the perspective of a software copyright attorney, here are the 5 most important revenue recognition issues (based on my experience), for Software Agreements and SAAS Agreements.

    Acceptance. Make sure there is express language in the license agreement or order that states that the software is ‘accepted’ on the order date. I can bore you with all of the reasons why, but I would simply add this one to your end user license agreement or other type of end user software agreement [in general this is more of a software licensing issue for business customers, than a licensing issue to consumers or a SAAS issue].

    Warranties with Refund Rights. This is a pretty thorny issue, but in general, other than a standard limited duration performance warranty that the software will perform in material accordance with its documentation and an infringement indemnity warranty/remedy, any additional warranty with refund rights could create a real revenue recognition risk.

    Future Deliverables. If you think about it, this should be an easy one. The customer is buying the license for the software (as it currently exists), so there should not be any commitment regarding future enhancements (other than standard maintenance/support) in the contract or outside the contract.

    Signed Agreement. While this should be a no-brainer too, having a signed agreement (that means by BOTH parties) is critical to a final deal. While most people focus on getting the deal done, it is really not done until the agreement is signed (more …

  • Software Negotiations by Showing Respect!

    You Lose Nothing in Software Negotiations by Showing Respect!

    Here is something that costs nothing but can really help when selling software or other IT products or services, or otherwise in software negotiations. As a software attorney, I can tell you this can make a difference.

    Think about it: when negotiating with a purchasing manager or member of the IT department, you are dealing with a person at the other end of the phone (yes, I have worked with people that forget this basic fact). There are probably a lot of other things going on in their mind or life, besides buying the software, so a little respect can go a long way. By the way, all this means is showing ‘regard or consideration for, courtesy or deference.’ This is not hard stuff.

    This may be as simple as:

    1. making sure you address/listen to all their concerns and issues,
    2. don’t talk down to them (on the phone or in email),
    3. under-commit and over-deliver (don’t do the opposite),
    4. realizing they are not simply a check box in the buying process, and
    5. remembering that they will be taking a risk (putting their reputation on the line) if they select you as a vendor.

    When I work with software or cloud based clients as an attorney, I try to remind them of this very simple truth.…

  • Have SaaS Agreement Templates Become Commoditized?

    As a software attorney, I actually think about issues like have SaaS agreement templates become commoditized (= not distinguishable or different). My short answer to this question is no. Let me explain.

    There are many websites that sell form agreements for less than $100, and they could be a great place for a company with a very limited budget to start from. Of course (as an attorney) I would recommend that any form contract buyer talk to an attorney before using the form (to make sure it works for them and is consistent with their SaaS model, etc.).

    Think about it this way, SaaS agreement templates serve an additional purpose; they explain and educate the customer on how your SaaS model works and what they will be receiving (as no ‘tangible property‘ will be provided). For example, I propose that a SaaS agreement for one company should not be used by another company as the SaaS models may be different (e.g. data ownership, customer restrictions, warranties, support, renewal, payment, transferability, etc.).

    As a result, I think that SaaS agreement templates have not become commoditized and (more importantly) won’t become commoditized. I am not saying don’t buy a form online, but I am saying if you do, have it reviewed by an attorney who is very familiar with contracts of that type. Let me know if you agree or disagree?

     

    Disclaimer:

    This is for informational and educational purposes only, and is not legal advice. Consult …

  • What is a Software License, and How is it Measured?

    Every software company should understand what the term ‘software license‘ actually means (i.e. what is a software license?).

    As a software attorney that tries to keep it simple, let me briefly explain this: it is the right/permission to use the software from the owner. Remember that the user is not provided with ‘ownership’ to the software (as that is retained), but they do receive the right to ‘use’ the software.

    Q: What are the boundaries of the right to use software?

    A: Well, that depends on what the license agreement says…usually in the GRANT section… (e.g. x grants to y non-exclusive, non-transferable, license to operate the software on …….). There are literally thousands of possible license metrics (ways to measure usage), so a software company should communicate its license metric inside and outside of the license agreement (e.g. on the product webpage, in an FAQ).

    So the key things to remember in defining your software license and metrics are:

    1) Know what your license agreement says, as you are granting you users specific legal rights.

    2) Grant the users the ‘correct’ usage rights (but not necessarily more), as that is what they are expecting.

    3) It would be really great if your software operated 100% consistently with those license rights (i.e. if the license is limited to one …

  • Write Better EULAs and SaaS Agreements

    How to Inspire your Lawyers to Write Better EULAs and SaaS Agreements?

    It is not easy to inspire your lawyers to write better EULAs or SAAS agreements, but it is worth a try (I can say this as I am a eula attorney). Watch this short video about simplifying contracts; this speaker (a non-lawyer) did a great job of inspiring his audience (from the 2010 TED conference) and showing them that there is a better way to contract (hint: simplify, simplify, simplify). Did you get that? Hopefully I was clear enough.

    As a software licensing attorney, I am always looking for great content for top software companies, and this is one of them. Try to inspire your lawyers to help you contract better, as software and SAAS companies need to find efficient ways to contract.

    Remember: “Your contracts are too important to leave only to the lawyers!”

    Watch Now

     

    Disclaimer: This post is for informational and educational purposes only, and is not legal advice. You should hire an attorney if you need legal advice, which should be provided only after review of all relevant facts and applicable law.…

  • Is Your Software Agreement Airtight?

    I find that most clients believe that they have an airtight software agreement and their liability is limited to the contract value. Well, from the perspective of a software copyright attorney, as a general matter they are right, but of course there are exceptions (at least from the perspective of a software licensing attorney). Once of the exceptions is fraud claims.

    Fraud Claims: While there are many different flavors of fraud, essentially all of them are based on some type of ‘misrepresentation.’ Under certain strong legal theories no fraud claim/damages should be allowed when there is an underlying contract, but needless to say these claims are made to try to get around the contractual limitation on liability.

    SAP is learning a lot more about this issue, as they are facing a fraud claim for over $500 million arising from a $30 million software deal with Waste Management (the contractual price)…yes the claim is more than 10 times the contract value. So even though SAP negotiated their contract well and had it reviewed by their lawyers, they are facing a claim for more than 10 times the contract value. Read more here.

    Q: So what can a company do to avoid these claims?

    1) Get Involved Early in Customer Problems. What I mean by this, is have someone in senior management work closely with the people on the ground to ensure that this gets worked out.

    2) Use your Best People. This is not the time to use junior …

  • Contract vs. Copyright Protection. What is the Difference?

    While this is a complex legal issue, as a software copyright attorney,  let me try to simplify it so it can be useful for software company or IT based company (i.e. do I need a software licensing agreement or not)

    Essentially, one way to protect and provide information technology is via copyright law alone, which means that there is no contract and the IP owner is relying on federal copyright law to provide the buyer with their necessary rights (and to protect the owner).

    – For example, if you buy a book you own the tangible book (that is what you bought), but the author/publisher still owns the copyright to the book. You can read the book, write on the book, tear up the book, and transfer the book, but you can’t copy, prepare derivatives works (e.g. movies), publicly perform, etc. the book. You have to look at copyright law for more answers.

    – On the other hand, if you buy software and agree to a license agreement (=contract) then the contract and federal copyright law protect the owner of the software and determine your rights. If you want to use the software, you should read agreement first as it will explain what you can and can’t do. You probably can use it and destroy/delete it, but how you can use it, whether you can transfer the software and in general what your rights are depend on the contract and copyright law (you can see that this can get complicated).…