Software Licensing Best Practices From a Litigation Perspective

When a licensee breaches a software license agreement with a large technology company, they will likely find themselves in a multimillion-dollar intellectual property infringement litigation. That’s exactly what’s happening in the current litigation that Oracle is pursuing, alleging intellectual property infringement and breach of contract against NEC Corporation of America for $7 million in damages plus profits for the software usage under the licensing agreement. Oracle is also seeking attorneys’ fees and costs, per the provisions in the software license.

The lawsuit alleges that NEC, an Oracle Partner Network member, breached the software license agreement, and is liable for copyright infringement for using Oracle’s database. The breach here relates to a distribution agreement that granted an additional license for distribution to end-users. The usage was related to a biometrics identification system. Oracle says that their audit uncovered NEC did not pay all the licensing fees related to their usage, thus infringing on Oracle’s IP. You can read the complaint here.

Treble Damages for Copyright Infringement and Clawing Back Profits

Oracle is requesting the court to award treble damages based on their claim that NECs software copyright infringement was willful. “NECAM breached its contracts with Oracle by its acts and omissions, including failing to pay license and support fees owed to Oracle under the contracts and failing to provide information to Oracle as required by the contracts’ audit provisions,” states the complaint. 

Oracle says they are entitled to claw back NEC’s profits made through infringing the massive software company’s intellectual property, as well as the damages stemming from breach of contract.

Enforcement Mechanisms to Protect Against Direct or Indirect Infringement 

Any well-drafted technology licensing agreement will contain auditing protocols and mechanisms to ensure the parties are adhering to the provisions of the contract. The audit provision of a data and software licensing agreement allows the licensor to determine if the licensee has properly reported the required information to the licensor. The audits are there to uncover when the licensees have breached the contract.

The interesting thing about audit provisions in software licensing agreements is that there is the added possibility of mandating the use of self-executing enforcement auditing code that is embedded in the software being licensed. Think of it as a tracking code. Self-executing auditing codes of this sort can quickly identify each and every breach of the various licensing agreements and thereby identify intellectual property infringement and breach of contract. 

In this case, non-compliance with the 30-day notice period that Oracle gave NEC to pay the fees for use of license rights will have dire consequences. It’s so crucial for software licensees to understand how key provisions may work to a licensee’s advantage or demise. 

Adhering to the exact Scope of Software License Limitations

During the course of a license negotiation, the parties will surely go through what protections are granted to the licensors, and to end customers and users of the technology for breaches of software distribution scope. The Licensees often make mistakes and/or do not fully understand the license limitations in both the master service agreement with technology companies and specific software licenses. Consequently, when auditing code and protocols identify license agreement breaches, licensees can be forced to pay additional royalties, potential civil litigation damages, and be required to upgrade their licenses.

Large technology companies can institute lawsuits to show their customers and partners that they mean business when it comes to enforcing their service agreements and licensing agreements. This is where an attorney that has specific experience in software contracts becomes essential. To protect your company and be in compliance with the terms of your contracts, you need to understand the differences between Application Specific Full Use Licenses, Full Use Licenses, and Embedded Software Licenses.

using Software Licensing Agreements to the Advantage of the IP Owner

If structured creatively and strategically, software licensing agreements can also be used to the advantage of the IP owner. A complex and layered licensing structure along with a mandated auditing regime can even drive sales. Examples of such strategic usage include crafting software licensing agreements with an eye towards:

  • Driving sales of services and products and, thereby, help maximize royalties and fees
  • Allowing for compliance and enforcement mechanisms – like mandatory audit code protocols
  • Maximizing potentials for quick success with respect to a breach of contract litigation for intellectual property infringement
  • Setting the stage for the execution of ancillary license agreements and distribution agreements between the parties

This same principle is commonly used in the software industry and licensing agreements can be structured in this manner to drive sales and help maximize royalties and other fees. The impact of this kind of structure can be magnified by strategic use of audits, threats of litigation, and launched litigations for breach of contract, among of causes of action.

Quick Success in Litigation for Infringement and Breach of Software License

Software licensing agreements can also be used strategically to maximize the potential for quick success in intellectual property infringement litigation. Part of the strategy is to ensure that a licensee has signed or agreed to as many license agreements as possible. The Complaint filed by Oracle against NEC is an excellent example. Alleged breaches and copyright infringement by NEC were identified by the audit protocols and the audit results now form a solid litigation foundation. Further, the Complaint identifies more than a dozen license agreements that NEC entered into. Oracle alleges that each action taken by NEC that is a breach of one license agreement is is also a breach of the other license agreements. The complexity of the licensing structure is strategically valuable for Oracle’s litigation prospects. With so many license agreements at issue, litigation will be very expensive which, in turn, will encourage settlement. In this case, NEC will have difficulty defeating every claim and allegation.

Contact the leading New York technology law firm Today

For more information, contact Gouchev Law, a top full-service New York business law firm. Gouchev Law’s Technology Law Group focuses on software licenses, client service agreements, intellectual property, and commercial litigation. We represent technology companies in all technology law transactions and pre-litigation resolutions. Book a free session with a senior partner.

Disclaimer: The information in this article is for general information purposes only. Nothing in this article should be taken as legal advice for any individual case or situation. This information is not intended to create and viewing it does not constitute an attorney-client relationship.


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