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May 11, 2011 News 1 Comment

Termination Means Never Having to Say You’re Sorry, Right?

A good learning situation sprang to the forefront of my creative thoughts the other day. I was representing a great EHR vendor (a great client and a great EHR) in a substantial deal and ran into a surprising request from opposing counsel regarding the default / termination process and procedure. In the end, the issue was resolved quite simply and quickly by taking a different path, but I will save that for the end.

The provider / customer side did a very good job of establishing certain milestone events, such as the operational date for e-prescribing, the vendor’s EHR certification deadline, and go-live for the then-certified EHR. Kudos to them because they set the bar precisely where they needed it. The vendor realized the importance and accommodated.

You can guess where this is leading. Failure to meet a milestone event gives the client the option to terminate.

A very straightforward default procedure was included in the standard vendor agreement — one party provides written notice to the other regarding any alleged default, then the supposedly defaulting party has 30 days to cure the problem. If the problem is not cured at the end of the 30-day period, the party that alleged the default has the option to terminate the agreement.

Termination was specifically addressed to include terms such as:

  • All licenses granted terminate and all rights automatically revert to the granting party
  • Payments due at date of termination must be made within 30 days of termination
  • Each party returns the other party’s confidential information, including the software and all associated documentation

Simple, no? No.

The other side wanted to bifurcate the issue and create two sets of “termination” procedures. The first (same as above) required that all licenses and rights granted under the agreement return to the grantor and the agreement terminates. Everything is over and done and the parties go their separate ways. The second proposed that there were conditions where the agreement could be terminated due to certain actions of the customer/user, but that the EHR software would remain in use by the customer/user.

It took two document turns, some polite but blunt e-mails, and two conference calls to assure the negotiators on the other side that there was no scenario under which the license could be terminated and the customer could retain use of the software.

For those of you shaking your heads in amazement, there was credible rationale behind the request, which was basically, “We understand the need to terminate absolutely in most situations, but we don’t want the vendor to be able to walk away for seemingly small issues that could rise to the level of default.”

The conversation between us attorneys at the end went very quickly. If I would add language stating that termination of ongoing maintenance support is at the customer’s option, and that terminating maintenance will not terminate the licenses and other rights granted under the agreement, then we would be all set and the default / termination provision would be acceptable as drafted.

That was it. All we needed was a clarification on maintenance cancellation and the whole issue was put away.

As for me, familiarity with an agreement sometimes begets a comfort that anyone picking up the agreement immediately adopts your perspective and interpretation of the terms and conditions. Not always the case — sometimes I need a reminder.

Lessons for the Day

In the SaaS model, there is no separate license fee and maintenance fee. Both are rolled into the recurring subscription fee. Termination means termination. Everything is over. No access to the software, no service, no maintenance.

On the other hand, in the perpetual license model, the ongoing maintenance features and obligations can be cancelled separately.

Note that I used the term “cancellation” to make a point. The customer in this model pays the fee for perpetual use of the software. Cancelling maintenance does not (should not) alter in any way or manner the license of use previously granted to the client. But general termination is the same in both models — terminate the entire agreement and you terminate use of the software.

Finally, what you believe is plain understandable language might not be to everyone. So keep the terms (and with respect to termination, options) clean and clear in your agreements. It saves time and money up front and in the long run by eliminating confusion.

Please note the above was intended to be short and sweet. There are many other issues that pertain to termination, such as transition services, data extraction, and historical system access — the list goes on. My point is straightforward. Keep it clean, clear, and above all, understandable. If termination, then XYZ.

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

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Currently there is "1 comment" on this Article:

  1. What an excellent and well written article, Mr. O’Toole. Very interesting and very clear. I always enjoy what you write, and I always feel like I’ve learned a thing or two.

    Thanks for that..







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