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HITlaw 10/14/09

October 14, 2009 News 6 Comments

When is “perpetual” not perpetual?

Recent encounters in my practice have required me to carefully explain the intricacies of perpetual software licenses, so I decided to share some thoughts with the HIStalk readership. Perhaps due in part to the economy and in part to the anticipated availability of EHR funding, healthcare executives are asking some very specific and important questions in the HIT acquisition process, such as; “What exactly do I get for my money? How long until I must reinvest? How do I avoid or predict additional fees?”

Unless you are using a Software as a Service (SaaS) model, then you probably have acquired use of your software applications under one of many varieties of software licenses that ultimately grant to the license holder a perpetual right to use the software, subject to certain limitations. These limitations vary widely and would make a good topic for another writing. The purpose of this HITlaw article focuses on the single word PERPETUAL.

Perpetual license grants are never 100% perpetual. There is always a proviso. In most cases, this is fine and good and protects the vendor.

Here is a simple boiled down example: “Provided that the customer licensee abides by the terms of the license agreement, use of the software in perpetuity is permitted.”

Perpetual use is conditioned on abiding by the terms of the entire agreement, so read carefully and understand the license agreement offered by your vendor. Find the conditions under which the vendor can suspend or terminate the “perpetual” license.

And before I start another firestorm (like the non-disclosure clause HITlaw submission in August), let me be clear that there are some very valid and proper conditions for a vendor to suspend or terminate the right to use its software.

My point is to understand the terms of the license grant itself. First, the terms by which the license is granted (typically payment in full of all license fees) and then the events or conditions that could suspend or revoke that license. Make sure you identify the triggers and weigh the consequences as you make your vendor selection. Hard work up front can alleviate heartburn later.

Finally, keep in mind that the perpetual license is granted subject to certain limits, such as number of users, number of acute care sites, or net patient revenues. In that vein, perpetual also means “assuming status quo”. An increase in users, sites, or revenues above the stated maximum, while not a trigger for termination, could trigger payment of additional license fees, which is acceptable as long as the condition is clearly stated and understood up front.

Think of a standard cell phone bill. The customer pays a certain amount per month for up to X minutes of use. If the limit is exceeded, there is an additional fee. This is a simple example, which obviously leads to whole different discussion about being able to accurately predict the additional fees that could potentially arise should the stated limit(s) be exceeded (never leave this term open).

My advice and my mantra are consistent. Recognize and fully understand the terms of use for the license for which you are paying.

William O’Toole is the founder of O’Toole Law Group of Duxbury, MA.

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Currently there are "6 comments" on this Article:

  1. Thanks for the legal advice – every bit helps. I know you’ll probably get a load of related and un-related questions, so let me be the first. 🙂

    Along the lines of your article, are there circumstances under which I, the “buyer”, can terminate a software “lease” contract in the middle of the term, other than as stipulated in the contract?

    For example, let’s say I’ve signed a 3-year limited license (lease). After the first year, I discover a vendor offering a competing product for half the cost. Is there any general provision by which I can terminate the remainder of my 3 year contract, other than by paying the remaining 2 years of it in full?

    Thanks in advance.

  2. Thanks for the article. Here’s a question. Vendors have forced my hospital to re-buy software in the past when they called a release a new product or a version upgrade. Is it reasonable to buy an application only once no matter how many years we use it? How do we put that protection in a contract?

  3. [Caveat: I am a vendor]

    I’ve learned over the years that there’s a LOT of misunderstanding among “purchasers” of software about what they really “own.” None of us “owns” Windows or OS X or certainly (nearly) any of the software that runs our industry. It’s leased/licensed. The problem is that folks don’t understand the difference between PAYING for the license and OWNING the software. Once they stop paying for it (even temporarily), they feel like they own it.

    Over on one of the MGMA lists, I learned that a very large and well known vendor uses 10 year licenses by default (but apparently negotiating for a “perpetual” one is easy). I’ve been pondering the utility of this…a surprise bill 10 years later?

    Thanks for the post, I may direct some potential clients here.

  4. I would like to share my perspective from someone who has sold, supported, implemented and designed Healthcare Software as well as supported the associated Hardware and operating systems since 1984. I have seen a lot of Medical Software, Operating systems and Hardware come and go over the years. The only thing I have ever seen that is perpetual is change.

    In 1979 when I first started using a “word processor” the gold standard was WordStar. Microsoft had not even thought of Word yet and the operating system for these Micro Computers as they were known was Concurrent Dos or Unix or something similar. No such thing as MSDOS yet and windows was more than a decade away. I purchased a copy of WordStar and I’m sure I still own it but I seriously doubt I could find the hardware to run it now or the patience to use the formatting “Tokens” to place simple bold, underline, italics or font formats in place.

    Software and operating systems have usually had a set life cycle just like hardware. Yes you can limp along for 10 years on a Medical Billing system written in the late 80’s for Late 80’s hardware but in 2009 it is very antiquated and often difficult to maintain as well as keep up to date with the latest interfaces and functionality. If you are still running an old “Legacy” system consider yourself lucky and about 10 years past the expected lifetime of the software. You made a smart decision back then. Now it’s time to move to a newer platform and get more functionality, speed and return on your next investment.

    It would be nice if everyone could create a web app like what we now use to prepare our income tax online. But what had to happen before that could occur? The internet had to be developed and the browser had to become stable enough to support SaaS software. But more importantly you had to TRUST the website to stay around, to keep your information private, and to function flawlessly and quickly year after year as well as stay in business and not be bought out by a competitor. Of course I’m referring to Turbo Tax and not Kiplinger’s Tax Cut in case you were wondering.

    SaaS software is not new.. It used to be called Timeshare software. You rented the software and could care less what operating system or hardware it was running on since you did not own the hardware. We have come full circle from the Medical software of the Late 60’s and 70’s where it was too expensive for a Physician to purchase a mainframe or mini computer and run their own servers. The service bureau of the 70’s is now the SaaS vendor of the 2000’s. Why did service bureaus move from the forefront? Why did physicians purchase the infrastructure in people, software and hardware to do their own billing? Back in the 70’s they used a peg board and ledger system and copied their ledgers as their monthly statement. So why are Physicians not using the ledger and pegboard system any more? Because there have been massive changes since the 70’s and early 80’s. Insurance is filed for your patients now, as well as more difficult to get reimbursed. With the changes coming in healthcare who knows if SaaS software is even a smart purchase now? If we go to one payor that would streamline your needs to file insurance to different clearing houses and there may be no need to bill a patient.

    SaaS software might work for many physician’s but is your data really your data? How do you keep it from getting “mined” without your consent?

    So you can most likely purchase a perpetual license from any vendor. My father always said “Paper will sit still and let you write anything on it”. Meaning read the contract and know what you are signing makes common sense. Just know that your in perpetuity use is only as good as that vendors balance sheet, your willingness to loosen your grip on your data if it’s SaaS, the financial viability of having your software hosted versus doing it yourself for less. But in the end make sure you are not buying a perpetual license of Wordstar.

  5. Thank you for the comments and questions. To “Stuck in contract” and “Skittles”; unfortunately I am prohibited (if I want to keep my license to practice law) from dispensing specific legal advice in this public forum. That said, I may be able to work some topics like these into a future Q & A HITlaw article.

  6. Here is the argument for a license term. If a vendor provides a license with a five-year term (or longer) and with a defined renewal fee, then that vendor no longer has an incentive to sell the client a new system.

    Basically, a perpetual license is useless, because of technology changes. With a term-license, and a renewal fee, the vendor’s incentives and the purchaser’s incentives are aligned.

    Besides, with a term license, the vendor is created a more realistic expectation for their customer.

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