Negotiating Software as a Service Contracts Webinar Presented by Kristie Prinz Founder of The Prinz...

Negotiating Software as a

Service ContractsWebinar Presented by Kristie Prinz

Founder of The Prinz Law OfficeSilicon Valley, California

November 2, 2015

Software contracting models• Traditional software license

• Licensor grants right to licensee to download, install, and use software on local hardware for the term of license

• Services such as maintenance or training may be provided pursuant to separate contract(s)

• License fee charged for the term• Annual maintenance fee my be charged for annual

services such as updates, general upgrades, and technical support

November 2, 2015 © 2015 The Prinz Law Office. All rights reserved. 2

Software contracting models• Software-as-a-Service Contract

• Company hosts software in cloud and grants subscriber the right to the use the hosted software for term of subscription; local hardware only necessary to access hosted software

• Services such as maintenance and training are included in subscription

• Subscription fee charged for term of subscription• No annual maintenance fee charged; updates, general

upgrades, and technical support are generally included in subscription for no additional charge


Software contracting models• Advantages of Traditional Software License

• Data is stored locally on local hardware that licensee controls; data may be more secure

• Licensee can extract data from the software at any time and import it into new software that will read data saved to the same format

• Licensee has control over disaster recovery planning• Licensee may have more ability to customize software

functionality


Software contracting models• Disadvantages of Traditional Software License

• High costs of procuring IT support to take advantage of greater customization features

• Inconvenience of set-up and implementation each time new hardware required; possible IT costs required

• Higher costs of maintaining hardware required to run updated software

• Backup and disaster recovery planning the sole responsibility of licensee; risk that data can be permanently lost if backups fail

• Maintenance fees can be costly


Software contracting models• Advantages of Software-as-a-Service Contract

• Data accessible on multiple hardware platforms wherever Internet accessible

• Subscriber relies on software provider to backup data and provide disaster recovery planning

• Subscriber can immediately access latest updates and upgrades when they become available without having to invest in new hardware, IT resources, or upgrade fees

• Costs of maintaining hosted platform are spread among subscriber base rather than absorbed by individual licensees


Software contracting models• Disadvantages of Software-as-a-Service Contract

• Subscriber often completely dependent on provider to back up data and plan for disaster recovery

• Subscriber has minimal control over security of platform• Subscriber has no physical software product to run data

on in absence of provider; often has no copy of data either and may have no ability to extract data to readable platform

• Subscriber’s ability to use software dependent on service level provided


Software contracting models• Disadvantages of Software-as-a-Service Contract

• Subscriber is a “captive” user of software and may not have any recourse if prices rise unexpectedly, the provider goes out of business, the software is phased out, or the company is acquired by a less agreeable third party

• Subscriber’s access to functionality may be limited by the fact that the functionality is offered to all subscribers over the platform and available customization may be very minimal


Goals of a Well-Written SaaS Contract• For the Provider:

• Furnish the subscriber with a contract that explains how the service offering will work with respect to implementation, training, functionality, included and optional services, users, fees, service level, etc.

• Reassure subscriber through the terms provided that the disadvantages of relying on a hosted platform will be a non-issue for the subscriber

• Establish a workable service and billing framework for the relationship with the subscriber


Goals of a Well-Written SaaS Contract• For the Subscriber:

• Ensure that key terms are clearly defined and in accord with how the product is represented to work

• Take measures to minimize risk of uploading and storing data to a hosted platform

• Ensure that all potential fees associated with the “captive” platform have been anticipated and carefully defined

• Ensure that the services and service level required have been carefully defined and that subscriber has an “out” if they are not as represented


Fundamental Problems Commonly Seen in SaaS Contracts• Reliance on a contract that is based on a software

licensing model instead of a SaaS model • Reliance on a contract that does not describe and/or

does not contemplate the service offering that the provider is making available to a subscriber• Reliance on a contract that poorly or inadequately

describes how fees will be billed to subscriber


Special Considerations Unique to a SaaS Contract Negotiation • Implementation: Timetable and structuring of

subscription fees during implementation• Service Level Agreement• Termination Issues: Suspension for nonpayment,

expungement of data in suspension or after termination, retrieval or transitioning of data• Security of Platform: Data Breach Concerns• Back-ups; Disaster RecoveryNovember 2, 2015 © 2015 The Prinz Law Office. All rights reserved. 12

SaaS Contract Drafting Problems that Frequently Lead to Contract Disputes• Failing to draft terms that set appropriate

expectations for implementation with subscriber• Failing to draft terms that set appropriate

parameters for training• Failing to draft terms that adequately explain how all

fees that subscriber may incur will be billed • Failing to draft terms that address all issues

surrounding suspending services for nonpayment or in conjunction with a payment dispute


Best Practices to Avoid Common Drafting Problems that Result in Contract Disputes • Implementation:

• If implementation is required for SaaS product, include carefully drafted terms: • Describing implementation process, • Providing dates for completion of each step and functionality

that will be available on that date, • Defining all responsibilities of subscriber in process and

deadlines, and • Specify all fees that will be due during the implementation

period.


Best Practices to Avoid Common Drafting Problems that Result in Contract Disputes • Implementation:

• Bottom Line: Software provider should ensure that all aspects of implementation are carefully stated in the agreement clearly enough for an unrelated third party to understand.

• An agreement which does not adequately reflect the complexities of an implementation process may be subject to a dispute.


Best Practices to Avoid Common Drafting Problems that Result in Contract Disputes • Training:

• If training is going to be required for the subscriber to use the product, ensure that the contract carefully defines the exact nature of the training that will be provided to subscriber

• Provide dates, times, and locations in which the training will be provided

• Clarify all courtesy training costs vs. training costs that will be covered by subscriber

• Define what happens in the event of a subscriber cancellation


Best Practices to Avoid Common Drafting Problems that Result in Contract Disputes • Training:

• Bottom line: Software provider should ensure that all contingencies that could arise with the training that the subscriber is seeking are anticipated and carefully provided for in contract.

• If the agreement does not fully contemplate the training sought by the subscriber, the fees and expenses that may be incurred by that training, the contingencies that could arise with the delivery of the training, and any other issues, the unaddressed issues could lead to a dispute.


Best Practices to Avoid Common Drafting Problems that Result in Contract Disputes • Fees:

• SaaS contracts should carefully define how subscriptions will be made available to subscriber, including: • whether users will be sold in specific increments, • whether subscriber may add or reduce subscriptions mid-

subscription term, • the pricing of subscriptions, and• how pricing will be adjusted by the software provider.

• SaaS contracts need to specifically address when fees start in relationship to the commencement/conclusion of implementation.


Best Practices to Avoid Common Drafting Problems that Result in Disputes • Fees:

• Terms need to define whether prices will change upon renewal, including any caps on rate increases and notification requirements

• Bottom line: not taking the time to draft very precise fee schedules and accompanying terms frequently leads to contract disputes. Subscribers and software providers should anticipate how each side may want to make price-related adjustments after the relationship commences and draft specific terms in anticipation of contingencies


Best Practices to Avoid Common Drafting Problems that Result in Contract Disputes • Suspension of Services:

• If the software provider anticipates suspending subscriber’s access to the hosted system if a payment is not received on time, the provider should draft terms that carefully describe the following:• the process for suspending access, • the fees, timetable, and other procedural steps for re-

establishing service once payment is received,• the process, expenses of extracting data from the system, and• the timetable in which the data may be purged from the system.


Best Practices to Avoid Common Drafting Problems that Result in Contract Disputes • Suspension of Services:

• The software provider also should anticipate the possibility of a payment dispute and ensure that the contract describes any procedures for suspension of services while a payment dispute is being resolved.

• Bottom line: SaaS providers have the ability to deny subscribers access to the software platform, but if they exercise this remedy without ensuring that the process is carefully defined in the contract, the relationship with the subscriber may implode.


Key Clauses to Be Included in a Well-Drafted SaaS Contract:• Scope of Subscription:

• Rights of a subscriber to access and use service• Who is authorized to use the service• Responsibilities of subscriber and an authorized user• Length of subscription and any renewal


Key Clauses to Be Included in a Well-Drafted SaaS Contract:• Services Definition:

• What services are included in the subscription?• Anticipated vs. optional services

• What additional services are made available for an additional charge?

• Parameters of how each service operates.


Key Clauses to Be Included in a Well-Drafted SaaS Contract:• Service Level Agreement:

• Uptime Guarantee• What are the exclusions?• Ensure that the guarantee can be implemented.• Ensure that the guarantee is realistic.



• Service Credit• Ensure that any service credit provided is clearly defined and

easy to apply• Address whether the payment of a service credit is an

acknowledgement that a material breach occurred or the sole remedy if a service failure arises

• Address any consequences of multiple service credits



• Technical Support Response Times• Are they a guarantee or just a target?• Which party determines the urgency level?• Will the response be a resolution to the support issue or a

response only?


Key Clauses to Be Included in a Well-Drafted SaaS Contract:• Fee and Payment Terms:

• Fees that may be charged in conjunction with each service and the parameters of how they work;

• Costs may be charged for providing any services;• When and how payments will be collected; and• Consequences of late payments.


Key Clauses to Be Included in a Well-Drafted SaaS Contract:• Data Security Terms:

• Confidential Information; privacy policy • Level of encryption employed• Procedures employed to ensure data security• Data storage locale• Disaster recovery policy• If personal health information, business associate terms• Data expungement following termination


Key Clauses to Be Included in a Well-Drafted SaaS Contract:• Warranties:

• Class of warranty: performance vs. intellectual property• Scope• Exclusions; Disclaimers• Consequences of breach


Key Clauses to Be Included in a Well-Drafted SaaS Contract:• Indemnifications:

• Class of Indemnification: • IP/Trade Secrets• Acts of Employees• Data Breach• Other

• Scope of Indemnification


Special Issues to Contemplate in SaaS Negotiation• Transitioning off SaaS Platform

• Are transition services made available, and if so, for how long after termination?

• What is the scope of services available to subscriber?• What are the cost of services?• In what format will the transitioned data be provided?


Special Issues to Contemplate in SaaS Negotiation• Risk of Platform Shutdown

• Availability and viability of software escrow to reduce risk• Availability of a physical software product alternative• Portability of data to alternative platform• Availability of Transition Support• Notice requirement


SaaS Contract Negotiation Challenges

• Addressing software provider inherent risks of SaaS model where up-front investment required for implementation, customization, and training

• Addressing software provider concerns about subscriber misuse of service

• Addressing subscriber concerns about service level and recourse as customer if service level not met

• Addressing subscriber concerns about data security• Addressing subscriber concerns about liability risks


New Trends in SaaS Contract Negotiation

• Protections against subscriber non-performance issues• Protections against data breaches; notification

requirements and obligations to remedy• Restrictions against subcontractors• Negotiation of on-site work terms• Insurance maintenance requirements


Speaker Contact Information:Kristie D. Prinz, Esq.Email: [email protected]: 408.884.3577The Prinz Law Office Silicon Valley Locations:

Los Gatos: 20 S. Santa Cruz Avenue, Suite 300Los Gatos, CA 95030

Sunnyvale: 1250 Oakmead Parkway, Suite 210Sunnyvale, CA 94085

Prinz Law Office Website: www.prinzlawoffice.comSoftware Law Blog: www.siliconvalleysoftwarelaw.com


mailto:[email protected]

http://www.prinzlawoffice.com/

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