When a customer is negotiating a license agreement with a vendor, the customer undoubtedly contemplates factors such as how much it will have to pay and when, and what systems, applications and services the vendor will provide in return. While the customer certainly should contemplate these types of issues, due consideration should also be given to the importance of the customer’s right to continue to access and use those systems, applications and services after the end of the license agreement. Mission critical software systems, applications and services should be subject to a transition period so the customer’s vital business functions are not effectively brought to a halt.
The simple fact is that all license agreements will end. Some license agreements have a stated term and thus will expire. Evergreen license agreements may not expire, but services provided under such agreements could have term-based durations. Also, license agreements could potentially be terminated by either party.
When a license agreement ends, a myriad of contractual obligations may be subject to some form of a generic survival clause in the agreement. For example, the requirement to hold the other party’s proprietary information in confidence likely will survive the end of the agreement. But what about, for instance, the vendor’s obligation to continue to provide hosting services for the customer’s mission critical healthcare system?
When the customer plans to terminate a license agreement, or the agreement’s expiration date is approaching, the customer may be more able to plan ahead for a seamless transition to another solution. However, a vendor could terminate the license agreement, and suddenly the customer’s rights to access and use the systems, applications and services are terminated as well. Accordingly, the customer should reflect on the time allotted for a termination for convenience and the breach notification and cure process: if the customer only has a short amount of time (e.g. sixty days) to cure a breach, it is unlikely that the customer could locate another vendor, negotiate an agreement and go live with a different solution (or bring the solution in-house) in that period of time.
In order to address this situation up front, the customer should push to include an express transition period in the license agreement. A sample of such a provision follows:
Notwithstanding anything to the contrary contained in this Agreement or otherwise, in the event this Agreement terminates or expires for any reason, the parties’ rights and obligations under this Agreement, including the terms and conditions of this Agreement, may, at Customer’s election, continue for up to twelve (12) months (the “Transition Period”). During the Transition Period, Vendor shall provide Customer with copies of all of Customer’s data and confidential information, in a format designated by Customer (the “Transition Services”). If Customer terminates this Agreement for cause, the Transition Services shall be provided at no cost to Customer; otherwise, Vendor may charge Customer for such services at its then-current time and materials rates.
Details the customer should consider when crafting a transition period include (a) the duration of the transition period, (b) any services the vendor should perform for the customer during the transition period, and (c) the applicable fees for both the transition period and any transition services. The above sample transition period obligates the vendor to provide the customer with a copy of all of the customer’s data. This is particularly important in a hosting engagement, because during the transition period the customer will assumedly be contracting with a new vendor and preparing to load all of its data onto that vendor’s system or preparing to take the system in-house.
In addition, the transition period should be incorporated into the other parts of the license agreement which address the end of the parties’ relationship. Particularly, a majority of obligations which would have been triggered upon termination of the license agreement should instead begin at the end of the transition period. For example, rather than mandating that the customer return all of the licensed materials upon termination of the license agreement, the agreement should mandate that the customer do so upon the termination of the agreement and later expiration of any transition period.
In sum, any customer that will be contracting for mission critical systems, applications or services should ensure the license agreement includes a transition period. To help with this decision, think “Could we live without _______ for a few weeks or months?” If the answer is “no” then you need to address this situation before you sign the license agreement.