TECHNOLOGY, OUTSOURCING, AND COMMERCIAL TRANSACTIONS
NEWS FOR LAWYERS AND SOURCING PROFESSIONALS

Picking up where we left off last week, below are some additional key issues to consider and address when negotiating source code escrow provisions.

  1. Duration of Source Code Use. The license grant following the source code escrow release event should specify the duration of the customer’s source code use rights. Typically, the source code license rights will have the same duration as the customer’s original license rights under the license agreement, as they may be renewed by the customer. This approach is consistent with section 365(n) of the U.S. Bankruptcy Code. Two typical source code use durations are as follows:
    1. If the original license is a term license and the customer elected to retain the license under section 365(n), the source code license would have the same term. The customer would have the right to renew the source code license using the same methodology as would be applied to renewals of the original license rights in the license agreement.
    2. If the original license is perpetual, the source code license would also be perpetual.

Source code escrow arrangements can be a contentious topic in software license negotiations. Vendors are reluctant to make their proprietary source code available to third parties, while customers are concerned about business disruption if the vendor goes out of business or otherwise stops supporting the software. Below, we have outlined some key issues to consider and address when negotiating for the source code escrow remedy. We will continue this list in a post next week.

Is release an effective remedy?
Given the amount of time that often goes into negotiating for source code escrow provisions with vendors, before requesting this remedy, customers should consider whether they would want to, or would be able to, effectively use the source code once they receive it. Customers may choose not to negotiate for source code escrow if (a) they do not have, or do not want to engage, in-house expertise and other resources necessary to host and maintain the code themselves and/or (b) there are other solutions available in the marketplace that the customer could transition to if needed.

As we described in our first post on the increasing use of software robots in outsourcing, software robots are becoming more widespread because of their growing capabilities to execute business processes, such as customer service and IT service management. Highlighted below are some of the business drivers and potential benefits of using software robots.

  • Labor Cost Mitigation. One of the primary drivers of offshore outsourcing has been labor arbitrage—leveraging the lower costs of offshore vendor personnel to achieve savings. However, the difference in expense has been gradually shrinking. Wages in India (long popular because of its English-speaking population and highly educated workforce) and other offshore locations are rising—both because of inflation, which has been consistently and significantly higher than in the United States in recent years, as well as other reasons, such as employee retention (salary increases to reduce the incentive to leave for a competitor). As a result, customers are seeking alternative strategies to keep costs down. Software robots offer a potential mitigation strategy against rising labor costs for the following reasons:

California legislators recently signed Senate Bill 962 into law, which requires manufacturers to install kill-switches on smartphones sold in California that are made on or after July 1, 2015. A kill-switch allows a smartphone owner to remotely disable the device via a wireless command, which renders the device inoperable to unauthorized users. This new law was passed on August 25 to deter smartphone theft in California.

Although manufacturers must include the kill-switch on smartphones, consumers will have the option to disable it as long as the consumer is informed that the function is designed to protect him or her from unauthorized use of the phone.

In signing Delaware House Bill 295 into law on July 1, Delaware became the latest in a series of states to address the safe destruction of documents that contain consumers’ personal identifying information. Under the law, a commercial entity—i.e., a corporation, business trust, estate, trust, partnership, limited partnership, limited liability partnership, limited liability company, association, organization, joint venture, or other legal entity, whether or not for profit—must take reasonable steps to destroy or arrange for the destruction of personal identifying information in its custody and control that the commercial entity will no longer retain. This consumer information must be shredded, erased, or otherwise destroyed or modified so that the information is entirely unreadable or indecipherable.

As part of its simplification initiative, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update on August 20 that addresses accounting principles related to cloud computing arrangements. The proposed update is intended to provide customers in such arrangements with guidance about the financial reporting of fees paid for cloud computing services.

A growing trend in the fitness industry is the use of wearable electronic devices to track personal health and training information, such as sleeping patterns, heart rate, running speed, calories burned, current location, and distance and route traveled. These wearable devices are aimed at consumers who want to live healthier lifestyles by letting them track their daily activities to help monitor their fitness progress. Although perhaps helpful for such purposes, using these devices may come at the expense of one’s privacy.

Outsourcing stakeholders should check out Deloitte's 2014 Global Outsourcing and Insourcing Survey. The survey results highlight what the future may hold for companies across several business functions and provide “insight into client executives' plans and perceptions related to the outsourcing industry.”

As outsourcing service providers and customers become more mature, a larger number of customers are relying on multiple service providers for services that were traditionally provided by one provider as part of a larger outsourcing transaction. Although multi-sourced environments are on the rise, they are not without issues or concerns. Before implementing a multi-sourcing strategy, customers should be careful to address certain key issues during the negotiation of each new outsourcing relationship.

The National Institute of Standards and Technology (NIST), the government agency charged with promoting U.S. innovation and industrial competitiveness by advancing technology, recently published a list of 65 forensic challenges associated with cloud-based environments. These challenges range from standard business practices to technological architecture and include the following: