Buying Proprietary Software?
Protect your organization from open source surprises
Jul. 9, 2012 07:00 AM
Open source software has probably been the biggest driver of complex software solutions in the last decade. Access to a large variety of quality, peer-reviewed software has accelerated product development, reduced product introduction intervals and lowered the costs for producers of software and for those of us who leverage third-party software in our projects.
Many of us have heard about the trouble that organizations have come across when using open source improperly... remember Cisco/Linksys, Katzer, and the BusyBox chronicles? You may think that your organization is safe because you are buying proprietary software. However, if your software supplier unknowingly incorporated open source into its product, your organization may face unexpected legal and financial consequences arising from open source licensing obligations and the resulting intellectual property infringement claims. The good news is that there are various tools available at your disposal that can assist your organization in protecting itself from such open source surprises, such as contractual measures such as representations and warranties and indemnities; and extra-contractual tools such as software audits and a structured Open Source Software Adoption Process (OSSAP).
Some Basics About Commercial Contracts Relevant to Software Purchases
However, in many instances it is impossible for contracting parties to fully guarantee the accuracy of a statement. In these cases, parties opt to provide reps and warranties that are qualified by the knowledge of the party providing them. These types of reps and warranties can be problematic from the perspective of the party that seeks to rely on them. We will return to this in the following section, which specifically deals with the application of reps and warranties, and indemnities to open source.
Indemnities provide security against losses that are triggered by the occurrence of contractually specified events. Unlike reps and warranties, recovery from indemnities is not contingent upon whether a misrepresentation was made. In our example, if Softco Supplier (the "indemnitor") indemnifies Softco Buyer (the "indemnitee") for any intellectual property infringement claims against the software being sold, then in the event that such claims arise, Softco Supplier is obligated to compensate Softco Buyer for its losses.
Reps and Warranties vs. Indemnities in an Open Source World
The recent focus on open source reps and warranties and indemnification is linked to the growing instances of intellectual property infringement claims involving open source software. As courts in the United States, Germany and elsewhere have acknowledged the enforceability of open source licenses, notable violators have succumbed to costly settlements, and enforcement organizations such as the Free Software Foundation have become more aggressive in launching suits.
Because of the immense financial and legal implications of intellectual property infringement suits, a software buyer will often require its supplier to represent and warrant that the software being purchased does not contain any open source code. If open source is later discovered in the software, the buyer is entitled to seek damages from the supplier for the breach of the representation. However, as mentioned earlier, it's often difficult for contracting parties to fully attest to the accuracy of a representation. This situation arises in instances in which the contracting party experiences knowledge gaps. In these cases, a contracting party will seek to limit its liability by narrowing the representation to apply to the knowledge that it possesses. Taking our earlier example, if Softco Supplier had acquired code from a third party, or engaged in outsourcing of programming, it may not be positioned to fully attest to the fact that the software it sells does not contain any open source. As a result, Softco Supplier will represent and warrant that ‘to the best of its knowledge, open source is not incorporated into the product.' In this case, Softco Buyer is only entitled to damages if it can show that Softco Supplier knew that its representation was untrue at the time that it was made. If this fact cannot be established, Softco Buyer is left without a remedy for any losses arising from Softco Supplier's misrepresentation.
Unlike reps and warranties, recovery from indemnities is not contingent upon whether a misrepresentation was made. Thus, if Softco Supplier indemnified Softco Buyer for open source infringement claims against the software, Softco Supplier would be obligated to fully cover the losses arising out of any such claims. In this case, it would be irrelevant whether Softco Supplier had knowledge of the presence of open source, as liability is triggered by the occurrence of the contractually specified event (the presence of open source) rather than the misrepresentation made by Softco Supplier.
Software Audit Can Minimize Exposure
A software audit entails code scanning aimed at detecting third-party and open source code. After the scanning stage, the purchaser is provided with an audit report detailing the identified code and associated license obligations. Performing such audits at the pre-purchase stage allows the buyer to understand whether the license obligations of the open source code are in line with the intellectual property policies of its organization, and if not, then the buyer is positioned to request the supplier to replace the code in question, or to engage an alternate supplier.
Software Audit in the Supply Chain
Review of Available Contractual Tools
Open source indemnities are also beneficial in comparison with reps and warranties, as they do not impose an obligation upon the party relying on them to take any action to minimize their own losses in the event of a breach.
Although open source reps and warranties and indemnities can provide software purchasers with means of recovery from intellectual property infringement claims, these contractual measures provide for an imperfect after-the-fact solution to a problem that lends itself well to management practices that would reduce the risk in the first place. Structured open source license management practices and software audits aimed at identifying third-party and open source code and ensuring open source compliance provide an optimal level of protection. These tools provide certainty regarding code pedigree, and enable software purchasers to avoid the negative consequences arising from intellectual property infringement suits.
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