Back in April 2020, we reported on the U.S. lawsuit between Micro Focus and Express Scripts concerning alleged over-deployment of Micro Focus’s terminal emulation software. I initially looked at the pretrial summary judgment proceedings and then Express Scripts won a complete defense verdict from a jury in May 2019, which I covered here.
Micro Focus appealed that judgment but then, in February 2020, they dismissed the appeal, with prejudice. The voluntary dismissal by Micro Focus concludes the entire litigation and leaves intact the District Court’s opinion and analysis, and the jury’s defense verdict in favor of Express Scripts.
I recently got the opportunity to speak with J.R. Scherr & Clara Kollm from the law firm Morgan, Lewis & Bockius LLP. They were part of the litigation team for Express Scripts throughout the case and have been kind enough to share their thoughts on the proceedings and some lessons that ITAM managers can take from the situation.
In 2015, Micro Focus conducted an audit of Express Scripts to measure the customer’s use of terminal emulation software under a 2010 “site license” for up to 10,000 “authorized users.” The customer hosted the software in a terminal server environment supporting 35,000 personnel and used Resource Access Control Facility (RACF) to limit use of the software to about 7,500 unique user credentials. Micro Focus alleged that all 35,000 users with access to the terminal servers had “access” to Micro Focus’s software, even if most of them had no way to meaningfully “use” the software because they lacked RACF credentials. Relying on its click-through EULA, Micro Focus sought damages measured by the “then current license and maintenance fees for the use of the additional licenses” to cover all 35,000 users with “access” to the software—which Micro Focus valued at more than $20 million—and argued that the customer violated Micro Focus’s copyright in the over-deployed software.
The parties went to trial in the U.S. District Court for the District of Maryland in May 2019. The court granted the customer’s motion for judgment before trial on the copyright claim, and then the jury found in favor of Express Scripts on the remaining claims following two weeks of testimony, evidence, and argument.
After the jury verdict, Express Scripts promptly sought its attorneys’ fees and costs from Micro Focus as the prevailing party. This is not typical in run-of-the mill software licensing disputes. However, because Micro Focus sued Express Scripts for copyright infringement, attorneys’ fees were in play, even though Micro Focus’s copyright claim was dismissed before trial. The United States Copyright Act (17 U.S. Code § 505) allows the prevailing party—plaintiff or defendant—to recover attorneys’ fees after a victory.
Micro Focus also moved for a new trial, arguing that the jury had been improperly instructed. In January 2020, the District Court denied Micro Focus’s request, rejecting every single one of its arguments, including that the parties had agreed to particular license types within its EULA.
Then, in February 2020, Micro Focus appealed the District Court’s decision to the United States Court of Appeals for the Fourth Circuit. The case languished for months on appeal during the COVID-19 pandemic, and Express Scripts never had an opportunity to respond. Instead, all deadlines were suspended in November when the parties settled both the appeal and Express Scripts’ pending claim for recovery of its attorneys’ fees. Micro Focus then filed its voluntary dismissal in January 2021.
I’ve been covering software audit related cases for a couple of years now as each of them presents a great opportunity for us all to learn and improve. Audits are, for better or worse, a common part of ITAM and they’re not going away anytime soon- as we saw in our recent audience survey, audits have been on the rise during COVID. Also, in that same poll, Micro Focus earned the dubious distinction of being the least helpful of software publishers when it comes to the audit process.
Following those results, we crowd-sourced some audit defence strategies and now, building on those, here are some of the key lessons from the Micro Focus audit and Express Scripts litigation that J.R. & Clara shared with me:
Audits appear more likely to occur after big purchases, internal reorganizations, and corporate mergers or acquisitions. Be especially diligent with communications with vendors around such times and events to reduce confusion and the likelihood of vendors believing an audit is required.
Certain key evidence admitted at trial included helpdesk tickets submitted by Express Scripts’ information technology department directly to Micro Focus. These support tickets established that Micro Focus knew that Express Scripts was using its licenses in a terminal server environment, undermining Micro Focus’s theory that Express Scripts had purchased only workstation licenses.
However, it’s equally possible that this could go the other way in another case – where direct communication between IT support and the vendor weakens or complicates your position. Ensure you have good levels of internal communication and clear strategy around who speaks directly with software vendors, when, and why.
Audits may be intimidating, but they are common and do not automatically reflect any wrongdoing. Make sure your ducks are in a row before an audit occurs so that you are prepared to push back, if necessary. A good way to do this is to perform an internal audit with the assistance of your legal department; having links between ITAM and Legal when things aren’t going wrong is a great way to strengthen your audit defence capabilities.