06 June 2003

Robert Berengeno

The German Supreme Court has strengthened the position of software developers and distributers in a recent case relating to a Central Processing Unit (“CPU“) clause.

The defendant, a software distributer and licensor of complex business software, entered into a licence agreement with the claimant, a licensee, in which the licence fee was due to rise by approximately €120,000 to €165,000 with each hardware upgrade.

At one point the licensee installed new hardware but the licensor’s software did not work on it because password protection had been triggered by the installation. The licensor demanded that the licensee authorise the increase in the licence fee before he would provide the licensee with a new password to allow the software to operate on the new hardware.

The licensee considered an increase in the licence fee to be unjustified because although the hardware was new it had been technically adjusted so that it did not constitute an upgrade, and he therefore refused to authorise the required increase in the licence fee.

The Supreme Court overturned earlier decisions in the lower courts in favour of the licensee. The Supreme Court held that the licensor of a high quality software product has the right to bind its customers to long-term licence agreements, which may include a CPU clause such as the one under consideration in this instance.

The Court did not accept the licensee’s argument that a rise in the licence fee under the contract was unjustified because the new hardware did not constitute an upgrade.

The Court decided that the risk of overriding the technical adjustments would be too high and that the licensor should not have to accept this risk. The Court allowed that the licensee in this particular instance was a well-known and reputable business, but stated that the rights of licensors in general had to be the overriding consideration.

The Court did acknowledge that the contractual increase in licence fees appeared quite high in this case. However, it was not within the Court’s powers to amend the licence fee, and stated that the parties would have to negotiate a reasonable agreement on this aspect.

In summary, this Supreme Court decision strengthens the position of software developers and distributors in respect of CPU clauses. Licensees are well advised to take proper care when negotiating licence fees for CPU clauses.

Important - The information in this article is provided subject to the disclaimer. The law may have changed since first publication and the reader is cautioned accordingly.