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Different judge, different verdict? Diageo's £54m SAP legal slap could have gone another way

Ambiguous contract language didn't guarantee outcome

Fencers photo via Shutterstock

If you use software licensed by SAP, you had better read your licence. If you have not yet acquired SAP software, you should make sure you use an experienced IT licensing lawyer before contracting.

If you agree to SAP’s standard licence terms and use the software in a way not expressly permitted by the licence, it could cost you tens of millions of dollars in completely unexpected incremental licence and maintenance fees. That is what happened to a UK company in a questionable decision released in the case of SAP UK Ltd v Diageo Great Britain Ltd.

Diageo had paid SAP between £50m and £61m in licence and maintenance fees to use the mySAP Business Suite. It integrated the suite with software from Salesforce using SAP PI integrator software. SAP claimed a staggering £54,503,578 in additional fees based on API access to its software. A judge in England on the liability aspect of the case sided with SAP on its right to collect additional licence and maintenance fees. However, the amount owing remains to be determined.

SAP’s standard licence terms purport to tie licence fees to usage. It claims fees based on any direct or indirect use or access to its software. Pricing is specified in exhibits to agreements which set out a price per category of Named User. SAP claims that the agreement further specifies that, apart from a few exceptions, if the customer makes any use of the software in a way not corresponding to any of the categories of use described and priced in the pricing exhibit, the customer has to pay additional licence fees based on SAP’s then current price list.

Diageo took the very reasonable position that since it had paid SAP licence fees to use its software; and since it paid SAP a licence fee to use the SAP PI integrator program; and since it only integrated third-party cloud based software that accessed or used databases residing in the SAP software; and since none of the named user categories in its licence covered this kind of use or access; and since no licence fees were otherwise specified in the pricing exhibit for these activities; and since the type of usage made by it did not even exist at the time of contracting; and since some of the use merely replaced access to the SAP software through call centre personnel with a more efficient way of accessing and using data in the SAP applications – it therefore did not have to pay SAP further licence fees.

Organisations routinely interface software licensed from one vendor with software from another and, like Diageo, do not expect to have to pay any additional fees – let alone tens of millions of pounds sterling's worth – to enable the licensed software to be accessed by a program or cloud-based solution that interfaces with it.

The judge sided with SAP in a ruling that easily could have gone the other way. The judge started her analysis by setting out the rules applicable to construing agreements:

When interpreting a written contract, the court is concerned to ascertain the intention of the parties by reference to what a reasonable person, having all the background knowledge which would have been available to the parties, would have understood them to be using the language in the contract. It does so by focussing on the meaning of the relevant words in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the contract, (iii) the overall purpose of the clause and the contract, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party’s intentions…

She then reviewed the key clauses of the agreement. SAP’s case relied on a recital and five main clauses in the agreement.

Recital A and clauses 3.1 and 3.2 read as follows:

Recital A. SAP wishes to grant to the Customer, and the Customer wishes to accept, a licence to use certain software on the terms set out in this Agreement. The usage authorised by this Agreement is set out in the Exhibit; this may increase over time by means of further Exhibits being signed.

3.1 Subject to clause 14, SAP grants to the Customer a non-exclusive and perpetual licence to use the Software and Documentation.

3.2 The authorised usage of the Software is set out in the Exhibit. The Customer shall inform SAP promptly if its usage is beyond that set out in the Exhibit, in which case additional licence and maintenance fees will become payable in accordance with clause 6.2.

Clause 6.2 read as follows:

Without prejudice to any other rights and remedies of or available to SAP, if usage of the Software does not correspond to the Exhibit save where such usage: i) is accidental; or ii) is unintentional; or iii) is undertaken by an individual exceeding his authority and does not result in any business benefit to Diageo in which circumstance the Customer shall immediately cease such usage and the parties shall in good faith and taking into consideration the business benefit derived seek to agree a fair and reasonable amount of compensation to be paid to SAP. In the event of repeated recurrence of such usage the parties will meet in good faith to discuss the circumstances that gave rise to the recurrence and in the event such recurrence cannot be prevented or subsequently happens again then the Customer will pay for the necessary licences, additional licence and maintenance fees calculated in accordance with Customers then current corporate pricing levels, or in the absence of the same SAP’s then current price list shall be due from the date on which the unauthorised usage was first identified. The Customer shall promptly sign and return to SAP a further Exhibit that SAP shall prepare detailing the relevant usage and fees but SAP’s right to receive payment of those fees shall not be dependent upon signature of this Exhibit.

SAP also relied on its definition of “Named User” which read as follows:

an individual representative (e.g. employee, agent, consultant, contractor) of the Customer, a Group Company, an Outsource Provider or a Supply Chain Third Party who is authorised to access the Software directly or indirectly (e.g. via the Internet or by means of a hand-held or third party device or system). The extent to which a Named User is authorised to use the Software depends upon his user category as set out in the schedule.

The judge’s interpreted the recital and these clauses to mean that the licence prohibited any use of the software other than by the categories and numbers of users set out in the Exhibit.

The starting point is the express words used by the parties in the Agreement. Introductory paragraph A and clause 3.1 provide that SAP grants to Diageo a licence to use the Software...

The extent of the licence is defined by Introductory paragraph A and clause 3.2 which state that the usage authorised by the Agreement is set out in the Exhibit…

The plain and obvious meaning of the above provisions is that only Named Users are authorised to use or access the mySAP ERP software…

Diageo correctly notes that the Agreement does not contain any express statement that users of third party software which interacts with SAP applications via SAP PI require individual licensing as users of the SAP applications. However, that does not detract from the clear wording in the Agreement that usage of the mySAP Business Suite is subject to Named User pricing. There are no words in the Agreement that make an exception to the general limit of the licence for usage of the mySAP ERP software when it is effected via SAP PI.

There is no room for arguments based on commercial value or contra proferentem where the objective meaning of the words used in the Agreement is clear and free from ambiguity.

The judge, relying on the “indirect” use and access language in the definition of “Named user” also held that the SAP software was accessed indirectly through the portal interface by Named User and that this access was not licensed even though the type of usage did not fall into any of the categories of Named Users.

It is common ground that the test is whether the Connect customers “use” or “access” the mySAP ERP software “directly” or “indirectly”. The Agreement does not contain a definition of these terms. The plain and obvious meaning of “use” in the context of the Agreement is application or manipulation of the mySAP ERP software. The plain and obvious meaning of “access” in the context of the Agreement is acquiring visibility of, or connection to, the mySAP ERP software…

In my judgment, the interactions identified above between the Connect customer and mySAP ERP constitute use of, or access to, the mySAP ERP software.

Clause 6.2 of the Agreement provides that if usage of the software does not correspond to the Exhibit, additional licence and maintenance fees are payable. The clause provides that any such additional fees shall be calculated in accordance with Diageo’s then current corporate pricing levels or, in the absence of the same, SAP’s then current price list.

Diageo’s pricing levels are set out in the Exhibit against various categories of Named User. The categories of Named User are described in the Schedule to the Agreement.

There is difficulty in allocating Connect customers to any particular Named User category. In 2004 such usage through cloud-based portals was not generally available and therefore, unsurprisingly, it is not explicitly identified in the Schedule. In any event, as Diageo has submitted, the descriptions of the Named User categories in the Schedule are very general and high level. They provide little guidance on the level of access or use envisaged for each group…

In my judgment, there is no applicable Named User category for the Connect customers in the current version of the Schedule. They do not have access to source or object code. They do not have access to the functionality provided by mySAP ERP in support of the wider operation of Diageo’s business. They access business process functions and information from the database for the purpose of ordering products and managing their own personal accounts only…

Clause 6.2 is in sufficiently wide terms to entitle SAP to additional fees based on its own price list if there is no relevant price for the category of additional usage identified.

In summary, usage by Connect customers is not authorised usage under the Agreement. SAP is entitled to additional licence and maintenance fees, the level of such fees to be assessed in the quantum phase of the trial, if not agreed, by reference to the nature and extent of the usage and SAP’s price list.

The judge could easily have read the agreement to reach a contrary decision by interpreting the agreement as follows.

  • Clause 3.1 granted the customer a right to use the software. Nothing in that licence granted limited access or use to only "Named Users".
  • The categories and numbers of licensed users were set out in the exhibit.
  • The wording in Recital A and Clause 3.2 was at best ambiguous. On one reading, the reference to “authorized usage” and “usage authorized by this Agreement” could mean, as the judge found, that the only permitted usage was usage by the category of users described in the Exhibit. However, another commercially plausible meaning was those phrases referred only to the number of "Named Users" per category set out in the exhibit. If that number was exceeded SAP merely became entitled to additional fees for the extra number of users in the category. In other words, the fees were variable depending only on the number of users in defined categories. SAP was not at liberty to charge new fees for uses not specified in the pricing Exhibit.
  • Since the language was ambiguous, there was “room for arguments based on commercial value or contra proferentem”.
  • If the customer and SAP had agreed on the incremental price for the additional usage by the categories of Named Users which did not “correspond to the Exhibit” (for the purposes of Clause 6.2), that price would be the additional amount the customer would pay. If there was no agreement on the amount of the additional fees, then the SAP price list would apply.
  • The judge did not have to decide the very controversial issue as to whether access to the SAP software through an API was an indirect use which made all or some users of the interfaced software Named Users. Since on the facts the judge found that even the indirect use was not by any of the listed categories of Named Users, SAP was not entitled to any additional licence fees.
  • The judge’s interpretation of Clause 6.2 was also unreasonable as it would effectively permit SAP to add new categories of uses and then arbitrary set new pricing for those uses.

For the reasons given above, there was a very sensible way to read the words in the agreement to reach a different result. The judge came to her conclusions, however, without any apparent attempt to consider what reasonable persons, particularly reasonable customers, would have understood the licence language to mean, the facts and circumstances assumed by the parties, or commercial common sense.

A lesson this case teaches is that software licence terms – particularly those that link payments to licensed usage – have to be carefully reviewed. Software companies often price software licences based on variable metrics such as the number of servers or cores, users or type of users, or CPU usage. This often results in licence fee surprises for customers.

Sophisticated software companies like SAP ensure their licences contain reporting and audit rights so they can detect excess usage and obtain additional fees. Some software trolls (and I have seen my share) often intentionally include in their agreements, or latch on to, ambiguous licence metric language for the very purpose of shaking down customers for higher licence fees.

If you are about to invest in a major software system, you should ensure the licence fees you agree to pay cover the usage you plan to make and that no additional or unexpected fees can be claimed.

Some software companies are known for being particularly aggressive in pursuing customers for additional licence fees based on wording in licences that capture “indirect” access or use. This form of ambiguous language leaves a door open for disputes between software vendors and customers. Potential licensees of software should have their lawyers carefully review these clauses and, at the very least, clarify their scope to limit future disputes.

If you are a SAP user, you should check your licence terms and audit how you use the software. Based on this decision, you might well get a call or audit request from SAP. ®

Reproduced with permission from the original by Barry Sookman on his personal blog here. Barry Sookman is a senior partner with McCarthy Tétrault, specialising in copyright, intellectual property, computer, internet, and e-commerce law, and also adjunct professor of IP law at Osgoode Hall Law school.

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