A common shortcut in due diligence is to give commercially-available, off-the-shelf (COTS) software a cursory review, since such licenses can easily be purchased if needed after the transaction is complete. However, if a due diligence target is out of compliance with a COTS software license, the cost to correct the noncompliance can be substantial — especially for a small company or a company that does not ensure that its employees understand the risk of noncompliance.
The U.S. Court of Appeals for the Sixth Circuit recently issued a reminder of this cost in Thoroughbred Software International v. Dice Corp. (No. 06-2080, June 14, 2007), when it considered a software license that permitted the licensee to make one backup copy of each licensed product. However, a software audit found the licensee made a 38 extra copies of one licensed product,and 31 extra copies of another product. Although most of the copies were merely residing on computers that were not being used, the court found the copies to violate the terms of the license and awarded the software company nearly $184,000 in damages. The Sixth Circuit also vacated the lower court’s denial of attorney’s fees and remanded the case to determine whether the infringing licensee should also pay the software company’s attorneys’ fees.
A few well-placed inquiries during due diligence can help to avoid headaches down the road, since in most cases software noncompliance can be corrected before a transaction is complete.
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