Software Service Level Agreement

China has enacted the "Interim Administrative Measures on Internet-based Transactions of Goods and Related Services" that will take effect on July 1, 2010.  This regulations should have a significant impact on e-commerce in China.  One can only assume that it will also impact Software Service Level Agreements, SaaS law, and cloud computing law.  The regulations appear to be focused on Business - to-Consumer issues and consumer-to-consumer activities, but the actual language of the regulation is pretty broad.   There are quite a few requirements related to form, contracts, issuing receipts, collection and treatment of information, record retention, etc.  

The main thrust of the regulation is to aimed at C2C platforms like taobao and E-Bay.  These platforms will need to verify vendor information as being a real name with real contact details.  It also push individuals to establish companies and obtain business licenses.

The impact that this regulation is likely to have on U.S. e-commerce or U.S. Business in general is likely nominal.  However, it does illustrate a trend toward regulation.  Luckily for me, more regulation means more work for yours truly.    

A software service level agreement is an important component to your engagement with a client, as this gives them an insurance policy that you will provide the software as a service at a level that satisfies them.  The SLA should include your services, availability, performance, priorities, responsibilities, guarantees, warranties and specifically define the what the "level of service" to be provided will be. 

However, a software service level agreement can be somewhat tough to negotiate because the goal is to keep the same standard of service for every client.  What may help you successfully negotiate your contracts, is to keep the terms of the SLA separate as an attachment to your master service level agreement. 

With an attached SLA, you can describe the levels of service, availability, performance that is the company's standard for every client.  With these standardized  terms removed from the main contract, they are less likely to become a sticking point in negotiations- especially if you can explain why they must be kept standard across the board. 

Most clients will understand how making any exceptions would become a administrative nightmare, and ultimately, a recipe for failure.  And, for those of your prospective clients who don't understand it, well... you may want to reconsider if you really want them as a client anyways.

How many times have you signed up for a service on-line, scrolled past all the legal jargon, and clicked "I Accept" or "I Agree" without taking the time to actually read the terms and conditions you're agreeing to? 

Admit it.  We all do it.  

But, just as a warning to be careful the next time you're purchasing that new mp3, or more importantly signing your company up for something on-line... those shrink-wrap and click-wrap agreements have been held by the courts to be binding.

Contracting in cloud computing law doesn't necessarily require a signature these days.  An affirmative acceptance of the provisions of a software service level agreement by an authorized agent can be given with a click of a button.

Take the recent trademark infringement case of Appliance Zone, LLC v. Nextag, Inc. for instance.  Although this case was dismissed on grounds of jurisdiction (which, incidentally, was a term of the shrink-wrap agreement that was held by the court to be an effective document) the court discussed some important software litigation surrounding click-through agreements within it.

In essence, if the facts support a claim that a person (a) is authorized to enter into such a contract, and (b) had the intent to enter into it, then they will be held to terms of service they signed up for, including basic contracting terms such as jurisdiction, venue, etc, etc.

The court in this case cited Gallent Ins. Co. v. Isaac in ruling that there was authorized conduct that clearly demonstrated the acceptance of a valid contract by the 19 year old website manager of Appliance Zone who registered the company as a merchant on Nextag's website and clicked "I accept the Nextag Terms of Service" as part of the process.

While the enforceability of a contract can be destroyed with factors that make it unconscionable (such as inequality of bargaining power, or unreasonable or unknown terms) the court did not find those arguments sustainable in this case for a number of reasons, including the fact that clickable acceptance has become commonplace for on-line retail, and the registration process could not have been completed without the click-through acceptance.

The court in this Indiana technology litigation case fell back on Paper Exp., Ltd., Micrometl Corp. v. TranzAct Technologies, Inc. with the "fundamental principle of contract law that a person who signs a contract is presumed to know its terms and consents to be bound by them." 

Next time, before you click "I Accept" make sure you really do.

There are several scope of license issues to work through when handling license agreement negotiations.  In my SaaS law (SaaS legal consulting) practice I often see licensees wanting to open the scope of the license to its “affiliates”. 

For many larger SaaS customers this makes sense as these businesses often operate as families of companies rather than single operating entities.  The customer may need to open the license to its other companies in order to properly use the software.  Just last week I was negotiating a Software License and Services Agreement with a Fortune 100 company that has over 50 companies in its U.S. operations alone.  They needed SaaS user seats for most of these companies.

The problem with the term “affiliates” is that it is not precise and may mean different things to different parties.  Some contract terms have clear legal meanings.  For example, “subsidiaries” commonly means companies which are owned and controlled by another company.  “Parent” commonly means the company that owns the subsidiary.  “Joint venture” commonly means a contractual relationship between two companies to engage jointly in a particular operation. 

“Affiliates” does not have a common meaning for most contractual purposes.  At the highest level the term points to a working or organizational relationship between two companies, but it is unclear how related the two companies have to be in order for them to be considered affiliates.  For example, are joint ventures affiliates?  Are management companies or consulting companies affiliates?

The term is defined differently in Federal and State laws and by legal dictionaries. 

The Banking Act of 1933, for instance, contains a very broad definition as any organization that a bank owns or controls by stock holdings, or which the bank's shareholders own, or whose officers are also directors of the bank.  This definition is probably much broader than most licensees intend and most licensors are willing to accept. 

The IRS defines the term much more narrowly (for purposes of consolidated tax returns) as a group of companies whose parent or other inclusive corporation owns at least 80% of voting stock.  This definition may be more narrow than the licensee intends.

The Investment Company Act defines “affiliates” as a company in which there is any direct or indirect ownership of 5% or more of the outstanding voting securities.  I am not sure if any licensee or licensor is intending that precise scope when using the term.

Black’s Law Dictionary defines the term broadly as a corporation that is related to another corporation by shareholdings or other means of control.  By that definition a management or consulting company could arguably be considered an affiliate.

The Ninth Circuit court recently adopted the Black’s Law Dictionary definition as it applies to the TCPA (an opt-in privacy law related to telephone marketing), but interestingly, the court also determined that because there was no direct contractual relationship between the two companies, they were not affiliates.  Thus, the court apparently also needs to see a contractual relationship between the businesses for them to be affiliates.

Finally, a note for Indiana technology companies – Indiana Code 23 (the Indiana business statute) does not define “affiliate” and Indiana courts have not yet addressed the definition in a business structure context. 

You see the point.  The term is messy – which is why it should be avoided.  The point of contracts is to be clear and avoid ambiguity.  This term can create ambiguity and lead to unnecessary disputes down the line. 

Here at Alerding Castor Hewitt, LLP, often times we work with clients who have software that inherently transcends state and national borders. 

Not just brick and mortor storefronts, many of our clients have customers nationwide and around the world.

Such is the realm of cloud computing law, and it's up to us as technology legal counsel to answer the inescapable question of what state, federal, or even country's law applies should a lawsuit arise.

Well, if you haven't contracted for this simple jurisdictional provision specifically in the terms of your license agreement or software service level agreement, as a SaaS company you may just find yourself flying over to London someday to deal with a breach of contract under U.K. law and their interpretation of your agreement. 

All I have to say is good luck, and I hope you are prepared for those Barristers' premium legal rates. 

Even if you win your case, you just wasted a tremendous amount of valuable time and money unnecessarily on SaaS litigation in the "wrong" venue.

I'm all for making the deal, but before you go shaking hands and rolling out your new Software as a Service application with a form agreement and without proper advisement, be sure to consult with reliable technology counsel to help you draft a solid agreement for your company's SaaS product.

A client asked me today if it is more usual for customer payments to be in advance or in arrears in Software-as-a-Service (SaaS) license agreements.  It is a great question as this is a common point raised in licensing agreement negotiations. 

The nature of a SaaS law license is that it is a subscription transaction.  There is a guaranteed term with a right to some use of the technology.  What makes SaaS transactions unique is the collaborative support services that support the license.  Some attorneys want to treat these transactions as service engagements rather than software licensing - but true to the heart of any SaaS transaction, it is a license to use the technology.  There is scope of use, restrictions on use, user seats, types of seats, IP restrictions and other common licensing terms.

This is key when chosing a pricing model as it should be priced as a software license (which requires the water to be turned on) rather than a services engagement (which requires delivery and acceptance).  Regarding the guaranteed term, most SaaS licenses are either on-demand (client pays as they use) or term subscriptions (e.g., monthly or annual rates regardless of amount of use).  For the on-demand licenses, payment terms are easy - they pay as they go. 

For the installment payments, payment terms should be set based on the nature of the SaaS tool itself.  If the payment is based on some variable component, such as a savings level acheived through the technology, it should be in arrears.  If it is a structured payment schedule, it might as well be in advance.  

A SaaS client of mine recently pointed me to a change in the Google Apps Service Level Agreement (SLA).  Google changed the definition of “Downtime Period” in their SLA to exclude the first 10 minutes of any time the SaaS tool is unavailable.   Thus, if the tool is unavailable for less than 10 minutes, that is excluded from any of the administrative headaches or credits to be issued for downtime.

Here is the full Google Apps SLA (notice the definition for "Downtime Period"):





Also, notice that Google Apps offers an interesting credit if downtime periods go above the guaranteed minimums - essentially adding days on the end of the service term.  Also, the burden of notice of downtime is on the user in order for credit days to be granted.

It is a good idea for any SaaS business to revisit their SLA terms on a regular basis – reconsidering terms based on trends in markets and what is reasonable and appropriate for the particular industry served.

Much of my business law practice is spent in SaaS law and entrepreneurial law fields.  Although I am often referred to as a technology lawyer, I consider myself a more general business law attorney with a focus in areas of technology such as SaaS.  In this role I have helped several SaaS and software licensing businesses construct their SLAs and determine what is appropriate for their industry.



 

Negotiation strategies are often quite similar to interrogation strategies.  “Clock Negotiation” is a process often used by large companies with deep pockets and bureaucracy when dealing with smaller companies with lesser pockets.

The goal of the large company is to send contract negotiations through multiple stages of review – with each stage going to a different division or office of the company.  In each stage following the first, the officer will chip away more and more at the terms or require additional services be added.  To the small company, this looks half hazard, but it definitely carries a purpose. 

Take a small software licensing business, for example.

Stage 1:  The contract starts at an informal meeting between the small software licensing company sales rep and large company business officer.  This is the exciting stage.  Everyone seems to be in agreement on everything!

Stage 2:  The contract is passed to some type of “commercial terms” review person – at which point sales rep is informed that large company has certain business terms (that are always "policies") that it must have in the contract.  These are not ideal terms, but they are definitely not deal killers and can fairly easily be agreed to.  There is little negotiation.  Software licensing company wants the deal and accepts the terms.

Stage 3: The contract goes to the “contract review” office at large company.  This is not legal counsel – just some mid-level worker with a checklist of what terms the company can and cannot agree to.  If there is pushback by the small company at this stage, there will be several conferences and e-mail exchanges, and the stage will stretch on for some period of time.  Finally, the contract officer will give some leniency on what originally were “non-negotiable” terms, but only if the software licensing business gives a lower price, a termination on convenience, or additional services at no cost. 

Then the contract officer tells small company that they now have to get the contract approved by legal – at which point the small company cries out something to the effect of, “I THOUGHT YOU WERE LEGAL!” 

Stage 3 ½:  Somewhere during Stage 3, the original business contact asks software licensing sales rep for some level of demo or pilot… or some level of free service as a proof of concept.  This, of course, is at the cost to software licensing company.

Stage 4:  The contract gets sent to legal.  Software licensing company is praying that this is only for their blessing and not for further negotiation.  But, in-house counsel are not paid to bless documents, they are paid to negotiate the best deal possible for large company.  At this stage large company understands that small company has sunk a lot of costs into this deal and to some degree has to take what is fed to them.  Legal asks for additional indemnities, warranties… they ask for termination terms… they ask to strike anything that leaves large company on the hook for any long term obligations.  Small company takes on more contract risk, large company takes on less. 

But it is never that clean.  There will be an impasse on certain terms… on to Stage 5.

Stage 5: When there is an impasse, legal discusses the contract term with some business officer off-line.  They then come back and tell small company that they can waive certain terms which were previously “non-negotiable” in return for lower pricing, additional services…

Stage 6:  Deal is made with legal.  But legal tells you that the contract must get blessed by some other sub-office (e.g., risk management, IT, ethics committee, green committee).  Taking risk management for example, they ask for changes to the insurance provisions of the contract.  This adds additional administration obligations and cost requirements on software licensing company.  Software licensing company is so deep into negotiation costs at this point that they almost have to say yes to anything given, and they know that if there is an impasse, you go back to Stage 5 and give up more business terms.

Stage 7:  Deal is made with sub-offices.  But legal tells you that this must be blessed by a final head officer – usually some Vice President.  Same cycle as Stage 6, and more unfavorable terms are pushed down on small company.