Software licence audits: legal and operational best practices

This article is an expanded and updated version of a piece originally published on Village de la Justice on 2 May 2016.

Software licence compliance audits are a frequent source of concern for customers of software vendors. Often perceived as a sanction, an audit can actually become a useful management tool — provided both parties prepare for it properly.

What is a software licence audit?

A software licence audit is an investigation conducted by the software vendor to verify whether the customer’s actual use of the licensed software is consistent with the rights granted under the agreement. The vendor typically requests an inventory of installed software, or conducts an on-site inspection. The financial and legal impact of such an audit — in terms of confidentiality, scope of rights and liability — makes it essential to address audit provisions from the time of licence acquisition.

A management tool, not just a sanction

An audit should not be treated as a penalty. Conducted in good faith and collaboratively, it can help the customer identify areas for improvement in its software asset management: repurchasing unused licences, converting licence metrics (per seat, per processor, per computing power) to match actual needs. It can also strengthen the relationship with the vendor and facilitate the negotiation of future acquisitions.

For the vendor, a proportionate audit conducted without excessive true-up claims can strengthen customer loyalty. In the event of disagreement, negotiation generally leads to a settlement. However, where no agreement is reached, licence overuse may constitute copyright infringement.

Best practices for customers

Several measures can help prepare effectively for an audit:

Review the audit clause at the time of contract signature: scope, timelines, confidentiality, consequences of non-compliance. For further detail, see the article on audit clauses in SaaS agreements.
Implement software asset management in coordination with the legal department, to track licence acquisitions and actual usage.
Conduct internal audits regularly to identify discrepancies before the vendor does.
Frame the confidentiality of data disclosed to the auditor and the conditions of access to the information system.

Best practices for vendors

Vendors also have an interest in conducting audits proportionately:

Include a clear and reasonable audit clause in the agreement.
Inform the customer in advance and respect contractual timelines.
Base true-up calculations on the actual contract terms, not on list prices.
Favour a negotiated resolution over litigation.

Second-hand licences add further complexity: it is important to verify that the conditions of resale comply with European case law (CJEU, UsedSoft v Oracle, 3 July 2012).

For an overview of the key provisions in a software agreement, see the SaaS contracting guide.

Conclusion

A well-anticipated software audit is a management lever, not a trap. The key is to prepare from the contract negotiation stage and to monitor your licence portfolio on an ongoing basis. If you are facing an audit or need to structure your licence management, book a call.

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