Fill and Sign the It Due Diligence Checklist Free Technology Mampampa Template Form

13.08 Instructions to Software License Due Diligence Checklist INSTRUCTIONS TO SOFTWARE LICENSE DUE DILIGENCE CHECKLIST 1. Background Information.1.1. Computer Technology. Computers are machines that manipulate (process) data. Computers are composed of hardware and software. Hardware is the wires, silicon chips and other physical pieces that provide the paths (circuits) for electricity to move through the computer. Software is the instructions that allow the hardware to perform useful manipulation of data. Computers can only use (software) instructions in a form (rather, in a language) that humans find incomprehensible. Computers need instructions composed of 0s and 1s; humans like to see instructions expressed in a language somewhat related to the written word. Software is therefore initially written and later modified in a computer language that is (relatively) easy to understand. This initial version of software is the source code. Before a computer can actually use the software, however, it is translated (compiled) into a language usable by the computer. This machine-readable version of software is the object code. This translation process is usually regarded as one-way; i.e., a person given only object code would have an extremely difficult task of approximating the source code from which it came. The possessor of source code therefore has open access to whatever proprietary secrets may be in the software. 1.2. Legal Treatment. Software is actually a concept that has been reduced or is reducible through compilation to a form that a computer can use: * As a concept, the legal treatment of software can be likened to that of a best-seller manuscript or a trademark for a successful product, where value is derived from the expression itself, as opposed to the means of expression. * As a concept that incorporates technological understanding with utilitarian functionality, software can be likened to a patentable invention. * As something that can become an integral part of a powerful machine, software can be likened to a valuable chattel, the mere use of which can bring direct economic gain. Protection of software secrets can involve patent, trademark and/or copyright registrations, but given the state of the law, most often relies on the terms of the contract licensing the software from the vendor/licensor to the user/licensee. 2. Completion of Worksheet, Generally. Always complete the upper right-hand corner of the first page with the project name, your name or initials and the date on which the data have been gathered. Remember that the purpose of the worksheet is to aid in a structured and consistent assessment of documents, not to supplant what you regard as relevant in reading the document. If an agreement provision seems relevant, yet has no corresponding Item in the worksheet, so note at the top of the first page and write your notes accordingly. If you have a note to make regarding a particular Item on the worksheet, use a nearby blank space on the form. You can also make notes on a separate sheet of paper, but be sure to note the number of the Item that you are referencing. Feel free to attach photocopies of relevant provisions rather than rewrite them in your notes. All notes and photocopies related to a contract should be stapled together with (and behind) the worksheet for that contract. 3. Item-By-Item Instructions. 3.1. Items 1, 2. Enter the name of the party exactly as it appears in the contract, including proper placement of commas and periods. If the entity type is not evident, leave these blanks empty. 3.2. Item 3. This information is often found in an attachment to the contract. 3.3. Item 4. If there is contract language stating that the contract is "dated," "executed on," "dated as of," or "executed as of" a certain date, such date will be the effective date of the contract, absent an express provision to the contrary. "Execution date," as used in the worksheet, refers to the latest of any dates near signature lines or to dates referred to by contract language such as "This Agreement is hereby executed on [as of] the day of ____________, 20__." 3.4. Items 5, 6. "CPU" means "central processing unit." The CPU is the hardware component that does the actual processing of data, as opposed to those hardware components that store, transport, print or display data. One CPU can support a large number of terminals and users (as with most mainframe computers) or it can serve only one user at a time (as with most personal computers). Licensor often intends to allow Licensee a certain quanta of benefit from its software for a certain price and therefore seeks to restrict Licensee from obtaining more than the intended benefit without renegotiating the contract (which invariably involves a higher license fee). This restriction most often takes one or more of the following forms: 3.4.1. Number of CPUs (Item 5). By restricting use of the software to a specified number of CPUs, Licensor restricts Licensee's ability to duplicate the software and thereby allow more people to use the software. 3.4.2. Specified CPU (Item 6). This prevents Licensee from upgrading a CPU to one that can handle more users. CPUs are usually identified by either (1) a description of performance characteristics; (2) a description of the manufacturer, model number and version of the CPU; or (3) serial number. 3.5. Transaction Volume; Number of Copies (Items 7, 8). Other ways to limit the benefit derived from licensed software. 3.6. Number of Copies Permitted to Run Simultaneously (Item 9). Presumably, no benefit is derived from software if it is only stored (and not running) on a computer. This type of restriction is seldom made an express provision of a license because of evidentiary problems (any software stored on a computer can usually start running on the computer within seconds). Yet, it is an implied term to most single-CPU, personal computer licenses without express restrictions on the number of copies. 3.7. Networked Machines/Remote Users (Item 10). Computers can be linked (networked) so that software can be easily moved from one to the other and so that processing of data can be shared. Software users, given the right hardware, can access computers and their software from anyplace where there are telephone (or other telecommunications) connections. Licensor may desire to limit the number and types of networked and remote-user connections allowed on the computers running and/or storing licensed software.3.8. Processing of Third Party Data (Item 11). This is intended to place restrictions on the ability of Licensee to sell data processing services to other persons using the licensed software. A seller of data processing services is often referred to as a "service bureau." 3.9. Sublicensing (Item 12). Provisions prohibiting sublicensing are very common. The intent is the same as with placing restrictions on processing third party data: to prevent Licensee from becoming a (direct or indirect) competitor with Licensor. 3.10. Upgrades/Corrections (Item 13). Licensor will most likely continue expending resources improving the licensed software after the contract has been executed. Licensee will not have the right to any such improvements unless expressly agreed to by Licensor. 3.11. Items 14-23. Object code is used to process data, yet is unintelligible to humans. Source code contains the trade secrets that make the software valuable. While the restrictions placed on object code use are therefore intended to limit the benefit derived from software, source code restrictions are most often intended to preserve trade secrets. See the analogous instructions for Items 5, 6, 8, 9, 10 and 13, above. 3.12. Right to Modify (Item 20). Source code rights are generally only given to allow Licensee (1) to modify the software to better suit its needs; (2) to maintain the software by removing errors (or "bugs") in the software as they are discovered; and/or (3) to preserve the right of Licensee to so modify or maintain the software should Licensor become unable to do so. "Modify," as used in this Item, refers to the right to modify, maintain or otherwise change source code. If such right is a contingent one [other than contingencies constituting a source code escrow (see Section 3.16, below)], the contingencies should be set out in a note. 3.13. Software Maintenance Responsibility (Item 21). "Maintains," as used in this Item, refers to the obligation to remove software errors as they are discovered. Usually, contracts will not assign to one party or another the obligation to maintain software; upgrades and corrections are licensed as they become available. If source code rights are granted to Licensee, Licensor usually only has maintenance responsibility (1) in an advisory or assistant role with respect to Licensee; and/or (2) if Licensee's source code rights are contingent upon Licensor's being unable to fulfill its responsibilities. Licensor's maintenance obligations are often set out in a contract separate from the contract creating the license (often entitled "Maintenance Agreement," "Development Agreement" or "Consulting Agreement"). 3.14. Ownership of Modifications (Item 22). Often, modifications to licensed software made by Licensee (including enhancements, error corrections and other changes) are owned by Licensor and subject to the contract even though Licensor has not been involved in or paid for such modifications. Rights to modifications can therefore be a source of controversy between Licensor and Licensee. 3.15. Source Code Escrow (Item 23). Source code is often placed in escrow when Licensee needs to be assured that it will have a continuing ability to make or purchase upgrades and other modifications to licensed software. There are a few companies that specialize in serving as source code escrow agents, and the contract provisions required by such agents are similar. These arrangements typically call for the release of the source code to Licensee in the event of the dissolution, abandonment, insolvency or bankruptcy of Licensee. If the source code escrow arrangements seem dissimilar from those described in the previous sentence, set out the relevant differences in a note.3.16. Tracking of Copies (Item 25). Copies may be required to be tracked by (1) assigning numbers to each; (2) keeping a written log of copies and where they are located; (3) assigning a responsible person for each copy; and/or (4) any other means, limited only by the imagination of Licensor. 3.17. Destruction of Media (Items 26, 27). Destruction or return of unused or damaged media can be required (1) as part of a tracking process during the term of the contract; and/or (2) upon termination of the contract. Be sure to indicate, by checking the appropriate blanks, whether destruction and/or return is required. 3.18. Implied Warranties (Item 30). Be sure to indicate if these disclaimers are not in ALL CAPS, in bold print or otherwise made conspicuous. 3.19. Year 2000 (Item 31). If Licensor warrants against "Year 2000" defects, the licensed software will not have its functionality impaired as a result of processing any date in 1999 or 2000 or as a result of any workaround that allows processing of such dates but otherwise impairs functionality. Be sure to note on the form any "weasel words" that might limit this warranty. 3.20. Item 34. Licensor, if offering indemnification for infringement, often reserves the right to cure by substituting comparable software not subject to claims of infringement. Do not describe the cure rights (other than noting their presence), unless specifically requested as part of the review or unless they seem peculiar in a generally relevant way. 3.21. Items 42, 43. Trade secrets of Licensor in source code or, to the extent that de-compilation or other forms of reverse engineering may be possible, in object code, will not be protected from exploitation by the Federal Government unless the Federal Acquisition Regulations and/or the Defense Federal Acquisition Regulations Supplement ("FARS/DFARS") are complied with. FARS/DFARS require that any items supplied to the Federal Government that embody trade secrets be conspicuously and consistently labeled as representing a transfer to the government of limited rights, as such limited rights are set out in FARS/DFARS. Without such labeling, nothing prevents the Federal Government from giving a product laden with trade secrets to a competitor of its manufacturer, encouraging (even paying for) the reverse-engineering of the product by the competitor, and completely supplanting the original supplier of product with its competitor, all to obtain a lower price (or any other reason the government deems sufficient). 3.22. Item 44. The exact operative language restricting assignment of a software license is often of great importance. A transfer of Licensee assets or stock can place Licensor in an ideal position to reap monopolistic profit. This is because (1) data processing can be essential to the day-to-day functioning of many businesses; (2) a particular piece of software can be one of the prime means by which such data is processed; (3) conversion to or development of alternative software can be very expensive and impossible to accomplish without many months of lead time; and (4) if the asset or stock sale breaches the contract, Licensor can usually demand its software back in days, not months, unless the contract is renegotiated. A simple statement that software cannot be "sublicensed, transferred or assigned" may allow for a merger, whereas the possibility of using a merger to avoid contract breach is eliminated if such statement is followed by the phrase "by operation of law, by merger or otherwise." There are many possible language variations, so it's necessary to put the exact operative language on the worksheet.3.23. Item 45. Licensor will often prevent Licensee from advertising the services sold by Licensee, which services are dependent upon the licensed software, without having such advertising carry a rights label for Licensor or, perhaps, without having Licensor approve the advertising in its entirety. Alternatively, Licensee may not want Licensor "showing its scalps" by including Licensee's name in its advertising without Licensee's prior consent. 3.24. Item 46. In answering the first question on this Item, enter the minimum number of days that can elapse between (1) either (as applicable) (a) notice of breach from Licensor, or (b) actual breach by Licensee; and (2) termination of the contract by Licensor. Some contracts may provide for notice of intent to terminate before termination may actually occur. Add in notice within the minimum period and any required period between such notice and termination, as appropriate, in answering this question. If the provisions are not amendable to simple explanation, attach a copy of the relevant provisions. 3.25. Item 48. An example of a "restriction" with respect to notice via mail would be a further requirement that return receipt requested mail is used. With respect to courier delivery, a restriction could be a further requirement that the courier service be nationally recognized. 3.26. Item 51. This item only calls for a check of obvious defects in execution, the classic example being the absence of a signature from a signature line.