Software Licensing in the Cloud

Transcription

1 Software Licensing in the Cloud Shaalu Mehra, Gibson Dunn & Crutcher, LLP Robert Lewis, Zhong Lun Law Firm ACC IP Licensing Committee Palo Alto, CA June 11, 2013

2 Overview Cloud-based software delivery models are evolving rapidly Changes are driven by: Evolving commercial considerations and models Flux, uncertainty, and inconsistency in legal frameworks We will review implications of these developments for cloudfocused licensing practices and delivery models 2

3 A Brief History of Cloud Computing Application-Based Service Providers (ASPs) Enterprise applications hosted remotely, accessed via Internet Software as a Service (SaaS) Turnkey web-based applications Drivers Startups Large enterprises Incremental vs. lift and shift 3

4 A Brief History of Cloud Computing (2) Virtualization Creation of virtual machines, or instances, of hardware resources Rapid deployment and provisioning of instances across data centers Vendors economies of scale Our working definition: Cloud Dynamic pools of virtual servers accessed via a wide-area network 4

5 Background: The Cloud Stack 5

6 Evolving Cloud Delivery Models Public Cloud Multi-tenancy Accessed via Internet Private Cloud Dedicated servers Dedicated private networks / MPLS 6

7 Evolving Cloud Delivery Models (2) Community Clouds By vertical Federated / Hybrid Clouds Mix of public and private clouds Net new vs. legacy 7

8 What s Driving Change in Delivery Models? Evolution of pricing considerations in the enterprise Capex vs. opex Pay by the drink Protections against overprovisioning Predictability Scale Price protections 8

9 Software Licensing Considerations All in one pricing vs. bring your own license One throat to choke No direct enforcement against software provider Lack of customary protections Conversion of legacy hardware-based metrics E.g., cores / sockets Interpretation in virtual environments Vendor guidance 9

10 Software Licensing Considerations (2) License impediments in legacy licenses Lack of platform support Hardware keys Explicit hosting restrictions Software vendor s SaaS / IaaS offerings Perpetual licenses vs. subscriptions Costs vs. lock-in 10

11 Software Licensing Considerations (3) Legacy assets Leverage sunk costs Legacy systems integration / customization Maintenance vs. subscription Potential restoration of maintenance, with credit for subscription fees paid 11

12 Change in Delivery Models Standard Terms of Use Drives operational economies of scale Uniformity of cloud services However, Terms may be incompatible with customer regulatory / operational requirements Control of documents Negotiation of one-off agreements predicated on size / scope of engagement 12

13 Change in Delivery Models (2) Factors Service level agreements Control of documents Disaster recovery / service restoration Data location Liability caps 13

14 Emergence of Community Clouds Regulatory requirements HIPAA BAAs ITAR / BIS Access restrictions Deemed exports Operational requirements by vertical Meaningful SLAs Legal and operational Disaster recovery 14

15 Interoperability Multi-sourcing in steady state Hybrid model Post termination transfer Lock-in Challenge: lack of uniform standards Proprietary system calls / libraries / standards PaaS Proprietary data formats SaaS 15

16 Interoperability (2) Considerations Persistent APIs (PaaS) Recognition by vendors OpenStack Document schemas (SaaS) 16

17 Interoperability (3) Reverse transfers Conversion into prior schema or alternative in reverse transfer Price protections Post termination licenses APIs / schemas Case law Code (with insolvency protections) Staggered escrow 17

18 Delivery Models for Cross-Border Cloud Services Multi-national customers require access in multiple jurisdictions Delivery models are structured for: Compliance with local laws Tax optimization Currency controls Examples: Delivery of cloud services in China and EU 18

19 Cloud-based services in China The main commercial structuring considerations for SaaS/Iaas/PaaS in China are the same as outside China The regulatory regime in China presents some important new twists 19

20 Who needs to know China cloud rules? MNCs with China subsidiaries using globally-sourced cloud-based services offerings Cloud-based services providers with China users o o Early stage start-up with footprint in China (to be more attractive acquisition target) Major global cloud services operator looking to access China market 20

21 Key structuring issues for the China cloud Where are the servers located? Place and currency of payment? Who owns the customer relationship? o Major accounts (MNCs in China, major SOEs, etc.) o SMEs 21

22 Key regulatory issues for the China cloud What licenses are required? What privacy rules apply? 22

23 Key elements of China cloud structures Servers o offshore not regulated in China o onshore need licensed IDC/ICP operator partners Customer relationship o reseller vs. agent vs. no face-to-customer Technology o supply of h/w, licensing of s/w and provision of tech support services are not regulated 23

24 If you need a license, can you get one? THE LAW vs. THE PRACTICE Under relevant Chinese law (and China s WTO commitments): Sino-foreign equity joint venture VATS entities (foreign-invested telecommunications enterprises (or FITEs)) are permitted Foreign equity share is capped at 50% Requires approvals from Ministry of Commerce (MOC), Ministry of Industry and Information Technology (MIIT) and other departments (culture, publishing, advertising, etc. as applicable) But in practice: MIIT rarely issues VATS licenses to Sino-foreign equity joint ventures (only a handful of FITEs in >10 years, compared with >2000 multiprovince licenses for purely domestic companies) Even in rare case where MIIT approvals are obtained, other approvals cannot be obtained as a practical matter Most foreign investors prefer not to be subject to the 50% investment cap so use common work-around structures 24

25 If you can t get a license, what do you do? <Presentation Title/Client Name> Offshore China Nominee shareholder controls Nominee shareholders Board of directors Weak-spot: so-called vertical nominee shareholder controls Foreign Party 100% WFOE Supply/ license/ services Captive domestic VATS operator End Users dividends revenue revenue Wholly foreignowned enterprise Co-hosting VATS operator Internet data center Typical VIE/nominee shareholder structure: Traditional workaround structure Validity increasingly now called into question Not necessary for cloud business? 25

26 China Roll-out of Global SaaS Offering <Presentation Title/Client Name> SaaS SP Global Saas Contract MNC global customer Data center Offshore Cloud Service Web Portal Onshore SaaS SP China entity Provide non-regulated bundled services to End Users Provide on-the-ground End User customer support Onshore internet connectivity China BTO Provide SaaS services to China End Users on cross-border basis China End User (MNC sub) Key structure elements: Servers located offshore SaaS SP China entity provides unregulated bundled services and customer support in China Question: who bills the customer in China? 26

27 Traditional Offshore Model #1 <Presentation Title/Client Name> SaaS SP Data center Key structure elements: Servers located offshore SaaS SP China entity provides unregulated bundled services and customer support in China Question: who bills the customer? Offshore Cloud Service Web Portal Onshore SaaS SP China entity Provide non-regulated bundled services to End Users Provide on-the-ground End User customer support Onshore internet connectivity China BTO End User (MNC sub) End User (SOE) End User (POE) Provide SaaS services to End Users on cross-border basis 27

28 Onshore Model #1 <Presentation Title/Client Name> Offshore Onshore SaaS SP HQ SaaS SP China SaaS technology license SaaS H/W and S/W supply SaaS technical services China VATS Partner Co-location of servers (title held by SaaS SP or VATS partner) Host and maintain web portal Sign SaaS service contract with End Users Issues bills to End Users IDC operator Cloud Service Web Portal Key structure elements: SaaS SP China entity (1) is the SaaS technology partner, (2) provides unregulated services directly to End Users, and (3) owns the overall customer relationship. Internet connectivity The China VATS Partner (1) holds the license, (2) provides the portal, and (3) runs the formal contract/billing relationship. China BTO Non-regulated bundled services contract w/ End Users Overall End User relationship management End User (MNC sub) End User (SOE) End User (POE) 28

29 Prime Contractor Onshore Model #2 Offshore Onshore SaaS SP HQ SaaS SP China SaaS technology license SaaS H/W and S/W supply SaaS technical services Key structure elements: SaaS SP China entity (1) signs the prime contract for the SaaS offering directly with the End Users, acting as the reseller of the VATS portion, and (2) provides all of the SaaS technology support to the China VATS partner for the service. The China VATS Partner (1) holds the license, and (2) provides the portal, all on a subcontract basis. IDC operator China VATS Partner Co-location of servers (title held by SaaS SP or VATS partner) Cloud Service Web Portal Internet connectivity China BTO Host and maintain web portal Cloud-base service prime contract with End Users SaaS SP China acts as reseller of regulated services provided by China VATS Partner End User (MNC sub) End User (SOE) End User (POE) 29

30 Onshore BTO/VATS Partner Model <Presentation Title/Client Name> Offshore Onshore SaaS SP HQ Key structure elements: SaaS SP China entity provides all of the SaaS technology support to the China VATS partner for the service. The China BTO/VATS Partner (1) holds the BTO/ VATS licenses, (2) provides the data center hosting, portal, and internet connectivity, all on a prime contract basis. IDC operator SaaS SP China Co-location of servers (title held by SaaS SP) China VATS China BTO SaaS technology license SaaS H/W and S/W supply SaaS technical services Host and maintain web portal Cloud Service Web Portal Internet connectivity Cloud-base service prime contract with End Users End User (MNC sub) End User (SOE) End User (POE) 30

31 China data privacy issues <Presentation Title/Client Name> Servers o offshore not subject to China s data privacy rules o onshore must comply Basic requirements o o o Personal information broadly defined Disclosure requires user consent Illegal collection, sale, provision or use of personal information may trigger criminal liability o Online businesses are responsible to maintain security of personal data 31

32 Conflicts in Laws EU Data Directive Patriot Act FISA Recent developments Prism 32

33 Questions? Shaalu Mehra, Gibson Dunn Robert Lewis, Zhong Lun Law Firm

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