Tag Archives: licensing

“Right to audit” provisions in technology services agreements can benefit both parties

“Right to audit” provisions in technology services agreements are common. You’ve seen them. A typical section will read something like this:

Vendor will keep accurate and complete records and accounts pertaining to the performance of the Services. Upon no less than seven (7) days’ written notice, and no more than once per calendar year, Customer may audit, or nominate a reputable accounting firm to audit, Vendor’s records relating to its performance under this Agreement, including amounts claimed, during the term of the Agreement and for a period of three months thereafter.

Clearly these provisions generally benefit the customer, to give it some transparency and assurance that the vendor is performing the services according to the agreement and that vendor is charging customer for the services appropriately.

But a right to audit provision can benefit the vendor (and go against the customer) as well. As a recent court decision shows (Carlson, Inc. v. IBM, 2013 WL 6007508 (D. Minn. November 13, 2013)), a customer’s comprehensive audit rights can preclude it from claiming that vendor owes it a fiduciary duty.

In the case, the customer sued its software vendor alleging, among other things, that the vendor breached its fiduciary duty. The customer argued that it had to essentially “hand over the keys” of its operations to the vendor. But the court ruled that vendor did not owe customer a fiduciary duty because the customer had several important rights to know about and control the vendor’s performance.

The master services agreement between the parties reserved for the customer the right to audit the vendor’s performance and challenge its pricing and delivery of services. Under the agreement, customer had:

  • regular and recurring access to vendor personnel;
  • access to complete records and supporting documentation underlying vendor’s services;
  • the right to conduct operational audits to examine vendor’s performance of the services;
  • the right to audit performance for comparison to standards in the service level agreement;
  • the right to financial audits to verify the accuracy and completeness of invoiced charges.

The court found that “[t]hese audit and oversight provisions [were] meaningless if [customer] was as helpless as it [claimed].”

So while vendors may find right to audit clauses to be a nuisance, they should remember that the presence of such a clause could provide an important defense in litigation over the technology agreement.

Evan Brown is a Chicago attorney helping businesses negotiate and draft technology services and development contracts. He also handles many other issues involving the internet, copyright and trademarks, and new media. Call him at (630) 362-7237 or email ebrown@internetcases.com.

How Twitter’s grant to the Library of Congress could be copyright-okay

Indigo Bunting - Audubon

Twitter is giving a copy of the archive of all tweets from the beginning of time to the Library of Congress. The inevitable outrage has ensued. One big concern is privacy. You gotta admit it’s creepy (and evokes Big Brother) to know that all your tweets will belong to the feds.

The other outrage-catalyst is copyright, and the possible violation of the license that one grants to Twitter via the terms of service.

Venkat and I exchanged some email earlier today on this topic. What if you delete your tweets? Doesn’t that terminate the license you gave to Twitter to store and share your content? How can the Library of Congress still keep its copy if the original license has ended? Fred Stutzman has also asked these kinds of questions.

These objections seem to presume that if one were to remove his or her tweets from Twitter, the license would be revoked, and any subsequent display by Twitter would be an infringement. I imagine that’s true in relation to Twitter, but I’m not so convinced when it comes to the Library of Congress. They’d likely fall under Section 108 of the Copyright Act.

Section 108 (17 USC 108) says that it’s not an infringement for a library to make a copy or distribute a work if (1) it’s not for commercial advantage, (2) the collections of the library are open to the public or available to all researchers in a particular field, and (3) the notice of copyright in the original work remains intact or if no notice can be found, there’s a legend stating that it may be protected under copyright.

You see what I’m saying? The Library of Congress would appear to have the right to archive one’s Twitter stream regardless of any assitance on Twitter’s part. In other words, by providing the archive, Twitter is just helping the LOC do something it’s entitled to do anyway.

What do you think?

Retrospective: Graham v. James

I’m speaking about open source at John Marshall Law School’s 53rd Annual Intellectual Property Law Conference on February 27. More info here (warning – PDF!).

To prepare, I’m going over some important cases dealing with copyright licensing in general, that is, cases that deal with copyright licensing but not open source. In case you’re interested, here’s a writeup I just did of the classic case of Graham v. James, 144 F.3d 229 (2d Cir. 1998):

Graham contracted with James for James to develop a custom file retrieval program for use in connection with a CD-ROM compilation that Graham published. The two had an oral agreement whereby Graham would pay $1,000 to James for each new version of the CD-ROM, plus $1 for each disc sold.

After Graham and James had a falling out, Graham continued to use the program James wrote in subsequent versions of the CD-ROM. Graham had removed a copyright notice from the program’s source code, and did not pay the promised royalties. The two ended up in litigation against each other with James accusing Graham of infringing the copyright in the program.

After a bench trial, the lower court found in favor of James on the copyright infringement claim. Graham sought review with the Second Circuit. On appeal, the court vacated the judgment and remanded.

There was no dispute that a license agreement had been formed. Graham argued that at best, James could recover for breach of contract for the removal of the copyright notice and the failure to pay royalties, but not copyright infringement. James presented a number of arguments in an attempt to show there was no license that authorized the use.

One argument that James made was that Graham breached the conditions of the license agreement (and thereby used the program outside the scope of the license) by removing the copyright notice and failing to pay royalties. The court rejected this argument, holding that such activities were mere breaches of contractual covenants between the parties and not a failure to satisfy conditions of the license agreement.

Citing to Nimmer, the court easily held that one does not have a cause of action for infringement when one fails to attribute the author. So there was no infringement resulting from that.

Under the circumstances, the nonpayment of royalties was not the failure of a condition for authorized use. Under New York law, there is a presumption that terms of a contract are covenants and not conditions. In this case, James turned over the program for use before any royalties were paid. Contract obligations that are to be performed after partial performance are not treated as conditions, but as promises (i.e., covenants).

Another argument James made (which the court also rejected) was that assuming, arguendo, the nonpayment of royalties and the failure to attribute were breaches of covenants and not failures to satisfy a condition of the license, the breach of the covenant was so material that the contract was terminated by rescission.

But rescission does not happen automatically upon a substantial breach. The nonbreaching party must “manifest his intention to rescind within a reasonable time.” In this case, the record did not show that James rescinded the license to Graham.

Since James failed to show the absence of a licensing agreement or a failure to satisfy a condition of the agreement, the court vacated the copyright infringement judgment.