Presenting a live 90-minute webinar with interactive Q&A Negotiating Software as a Service Contracts Guidance for Corporate and Technology Counsel for Structuring Effective SaaS Agreements TUESDAY, SEPTEMBER 8, 2015 1pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Kristie D. Prinz, The Prinz Law Office, Silicon Valley, Calif. Kelley C. Miller, Attorney, Reed Smith, Washington, D.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
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Negotiating Software as a Service (SaaS) Contracts: Guidance for Corporate Technology Counsel for Structuring Effective SaaS Agreements Strafford Publications Webinar September 8, 2015 Kelley C. Miller, Esq. Reed Smith LLP
Agenda of Presentation Topics: Kelley Miller I. Drafting and Negotiating Key Provisions in SaaS Agreements II. I. Introduction and Overview of Cloud/SaaS II. III. IV. Examples of Services Covered Under CSAs Data What is it? Data Use of SaaS Data by Cloud Service Providers V. Ownership of Data VI. Access to Data VII. Data Security Recent Legal Developments and Business Trends I. Pennies from Heaven : How Tax Authorities are Looking to Cloud Computing for Revenue I. Case Study in Cloud Taxation (U.S.): City of Chicago 6
Drafting Key Provisions in SaaS Agreements
Drafting Key Provisions in SaaS Agreements: Introduction Cloud computing is an often ubiquitous term used to describe many different processes involving Internet-based transactions. Some of the conceptions of cloud are correct; others are very misleading Similarly, cloud computing agreements have as different iterations (e.g., Click Wrap, etc.) as definitions of cloud computing. The purpose of this presentation is to provide an overview of these agreements and the many legal and compliance issues that are inherent therein. Key to this part of our discussion will be an understanding of contract terms as related to cloud data; namely, how data is owned, accessed and secured in the cloud. 8
Drafting Key Provisions in SaaS Agreements: Overview of Cloud Computing The key distinction between the three main iterations of cloud computing services is whether the function/attribute is managed by the customer or the vendor. As a general matter, the further along the continuum of cloud products (e.g., Infrastructure), the more a function/attribute will be managed by the customer. In the most basic of cloud computing models Software as a Service all of the functions/attributes are managed by the vendor a fact magnified by the many issues with CSAs. 9
Drafting Key Provisions in SaaS Agreements: Overview of Cloud Computing Cloud Computing, Defined Cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction. (NIST Definition) Essential Characteristics On-demand self-service Broad network access Resource pooling Rapid elasticity Measured service Service Models SaaS Software as a Service PaaS Platform as a Service IaaS - Infrastructure as a Service 10
Drafting Key Provisions in SaaS Agreements: Overview of Cloud Computing Software as a Service (SaaS), Defined The capability provided to the consumer is to use the provider s applications running on a cloud infrastructure. The applications are accessible from various client devices through either a thin client interface, such as a web browser (e.g., web-based email), or a program interface. The consumer does not manage or control the underlying cloud infrastructure including network, servers, operating systems, storage, or even individual application capabilities, with the possible exception of limited user-specific application configuration settings. (NIST) Essential Hallmarks of SaaS Use of software that is hosted remotely by a vendor ( service provider ); software is accessible by the customer ( user ) using the Internet User s data is remotely stored and processed using the service provider s software there is no software, storage or processing that occurs on the user s system 11
Drafting Key Provisions in SaaS Agreements: Examples of Services Covered Under CSAs E.g., Rackspace (Public and private clouds; Servers) E.g., Windows Azure (Runs apps; e.g., AccuWeather.com app) E.g., Office 365 (Allows users access to One Note anywhere) 12
Drafting Key Provisions in SaaS Agreements: What are you getting? What are your risks? BENEFITS Flexibility Ability to forecast needs (scale) and plan for cost Not locked into currentgeneration paradigms Can change quickly and get a quick response where change warrants the need for the same Control Data and Access to Data are Key! SECURITY Performance Reliability RISKS Vendor Lock-Ins 13
Drafting Key Provisions in SaaS Agreements: What are the most important factors effecting CSAs? (IT) 14
Drafting Key Provisions in SaaS Agreements: Why is it important to distinguish the CSA from other services contracts? Cloud services are not the same as contracts for software licensing only! Licensing, while a component of cloud services, is growing vastly more complex. Software licensing experts are not always on the same page as the business team executing the CSA. Accountability is Key! (1) Protect My Data! ; (2) Be Reliable (Uptimes and Contingency Planning) Not elements of licensing agreements, generally; and (3) Make It Right (When Something Goes Wrong ) CSAs = Marriage (Time + Cost) 15
Drafting Key Provisions in SaaS Agreements: Data What is it? Two Levels User/SaaS Customer + Customer Specific Considerations User/SaaS Service Customer Proprietary Data User/SaaS Service Customer PII Customer Data Customer PII Customer Locations and Preferences 16
Drafting Key Provisions in SaaS Agreements: Data CSPs Use of SaaS Data There are many ways in which a CSP may use SaaS data. Monitor and administer the service Respond to and resolve issues with the service Complying data for analytical purposes of how efficiently the software is running; use of this data for design new services aimed at customer or customer s market (anonymous as to customer/user-level identifiers; e.g., no production data should be released that may expose customer-sensitive data). Common among SaaS CSAs is a tool that uses application data to provide customers with statistical analyses for their own use and planning Key, Take-Away: No customer IDs; no customer data or personal identifying information! 17
Drafting Key Provisions in SaaS Agreements: Data Who Owns It? Who Owns What in a SaaS Transaction? SaaS Service Provider (Straightforward but important to specify in the CSA!) SaaS Service Provider will own all aspects of the cloud service configuration including User/SaaS Customer Any data provided by the User/Customer Other Parties (Hosts) May Own Components! Example OWNERSHIP. Other than the rights and interests expressly set forth in this Agreement, and excluding Third Party and works derived from Third Party, you reserve all right, title and interest (including all intellectual property and proprietary rights) in and to Your Content. Think about what will happen to data upon termination of the CSA 18
Drafting Key Provisions in SaaS Agreements: Data Access Service Level Agreement (SLA) SLAs will ideally contain specific parameters and minimum levels for each element of the service provided. SLAs must be enforceable and state specific remedies that apply when they are not met. Relevant SLA-SaaS Functions: Response Time Error Correction Time Infrastructure/Security/Privacy Downtime Downtime Period Monthly Uptime Percentage Scheduled Downtime 19
Drafting Key Provisions in SaaS Agreements: Data How to Protect It It may be necessary to reconsider the premise that an individual has no reasonable expectation of privacy in information voluntarily disclosed to third parties. This approach is ill-suited to the digital age. -U.S. Supreme Court Justice Sotomayor s Concurrence in U.S. v. Jones (2012). 20
Drafting Key Provisions in SaaS Agreements: Data How to Protect It Pre-Contract Due Diligence Jurisdictional Rules US and EU Provisions State laws Vendor s Privacy Policy US Security Laws Is the Vendor using/advertising the use of a third-party Cloud Privacy Certification Service (e.g., TRUSTe)? Vendor s Date Security Policy and Practices ISAE/SSAE Compliant? SOC Complaint? 21
Drafting Key Provisions in SaaS Agreements: Data How to Protect It User transmits data (PII) to SaaS Provider for processing User SaaS Provider 3. When and how is User s data encrypted 1. Will the SaaS Provider use thirdparty hosting supplier? 2. Where will the SaaS provider process User s data? 4. What security protocols are in place? Who is the Web Hosting Supplier? Where is it/its servers located? Where will servers be located during the term of the CSA? Web Hosting Supplier 22
Drafting Key Provisions in SaaS Agreements: Data How to Protect It Best CSA Data Security Practices 1. Be clear about where the data (PII) will reside. Clarity on restrictions; limit migration counter-balance with uptime considerations. 2. Be clear (as possible) about where your data processing will occur. 3. Be clear about when and how data (PII) encryption will occur. Remember: At-rest is best. 4. Be clear about the frequency of encryption, data transmissions, data back-ups and how the record of the same is kept by the vendor and regularly provided (e.g., Will User require Vendor security performance audits?) 5. Be clear about scope of the SaaS Provider s use of data. Contractual provisions that the data may NOT be used by SaaS Provider s own purposes (analytics are likely to be a point for negotiation). 6. Be clear about what happens if disaster or breach occurs Contractual provisions that the data may NOT be used by SaaS Provider s own purposes (analytics are likely to be a point for negotiation). Notice of incidents paramount. 23
Drafting Key Provisions in SaaS Agreements: Data How to Protect It Additional Security Considerations + Best Practices Requiring SaaS Provider Audits Server Location Audits SOW should address all controls used by the SaaS Service Provider Determine be clear about compensation in the case of data (PII) misuse or loss Specific terms as to use of subcontractors Think critically about term watch for auto-renewal clauses SaaS Provider limitations on liability Watch for: Excluding indirect and consequential losses Low liability caps (e.g., 1 year CSA fee) IP infringement Data loss, misuse, uptime delays and interruptions 24
Negotiating Software as a Service Contracts Guidance for Corporate and Technology Counsel for Structuring Effective SaaS Agreements Presented by Kristie Prinz, The Prinz Law Office, Silicon Valley, CA
I. Drafting and Negotiating Key Provisions in the SaaS Agreement D. Service Level Agreement 1. Uptime Guarantee (a) What are the exclusions? (b) Can the guarantee be implemented? (c) Is the guarantee realistic? 2015 The Prinz Law Office. All rights reserved. The Prinz Law Office Silicon Valley, CA Los Angeles, CA Orange County, CA San Diego, CA 26
I. Drafting and Negotiating Key Provisions in the SaaS Agreement D. Service Level Agreement 2. Service Credit (a) Is the service credit calculation clear and easy to apply? (b) Is the payment of a service credit an acknowledgement of a material breach? (c) Effect of issuance of multiple service credits 2015 The Prinz Law Office. All rights reserved. The Prinz Law Office Silicon Valley, CA Los Angeles, CA Orange County, CA San Diego, CA 27
I. Drafting and Negotiating Key Provisions in the SaaS Agreement D. Service Level Agreement 3. Technical Support Response Times (a) Guarantee or target? (b) Which party determines urgency level? (c) Resolution to support issue or response only? 2015 The Prinz Law Office. All rights reserved. The Prinz Law Office Silicon Valley, CA Los Angeles, CA Orange County, CA San Diego, CA 28
I. Drafting and Negotiating Key Provisions in the SaaS Agreement D. Service Level Agreement 4. System Responsiveness Guarantees (a) How do you measure responsiveness of web-based system vs. Internet connection speed? (b) Realistic guarantee? 2015 The Prinz Law Office. All rights reserved. The Prinz Law Office Silicon Valley, CA Los Angeles, CA Orange County, CA San Diego, CA 29
I. Drafting and Negotiating Key Provisions in the SaaS Agreement E. Warranties and Limitations 1. Warranties (a) IP Warranty (i) Parameters (ii) Exclusions (iii) Options in Material Breach 2015 The Prinz Law Office. All rights reserved. The Prinz Law Office Silicon Valley, CA Los Angeles, CA Orange County, CA San Diego, CA 30
I. Drafting and Negotiating Key Provisions in the SaaS Agreement E. Warranties and Limitations 1. Warranties (b) Performance Warranties (i) Parameters (ii) Exclusions (iii) Options in Material Breach 2015 The Prinz Law Office. All rights reserved. The Prinz Law Office Silicon Valley, CA Los Angeles, CA Orange County, CA San Diego, CA 31
I. Drafting and Negotiating Key Provisions in the SaaS Agreement E. Warranties and Limitations 2. Limitations of Liability (a) Unlimited vs. Fixed/Capped (b) Parameters of Liability Limits (i) Type of Claim (ii) Fixed Level vs. Multiple of Specified Fees 2015 The Prinz Law Office. All rights reserved. The Prinz Law Office Silicon Valley, CA Los Angeles, CA Orange County, CA San Diego, CA 32
I. Drafting and Negotiating Key Provisions in the SaaS Agreement F. Indemnification 1. Negotiated Indemnifications (a) Intellectual Property & Trade Secrets (b) Acts of Employees (c) Data Breach (d) Other 2. Negotiation Points 2015 The Prinz Law Office. All rights reserved. The Prinz Law Office Silicon Valley, CA Los Angeles, CA Orange County, CA San Diego, CA 33
I. Drafting and Negotiating Key Provisions in the SaaS Agreement G. Other Critical Provisions 1. Implementation Services (a) Defining Scope of Work (b) Establishing a Realistic Timetable (c) Defining Customer Obligations (d) Data Importation Issues (e) Defining Customization Milestones 2015 The Prinz Law Office. All rights reserved. The Prinz Law Office Silicon Valley, CA Los Angeles, CA Orange County, CA San Diego, CA 34
I. Drafting and Negotiating Key Provisions in the SaaS Agreement G. Other Critical Provisions 2. Training Services (a) Defining Scope of Services Offered (b) Structuring Training Service Fees (c) Setting Parameters (d) Defining Cancellation Policy (e) Defining Travel Policy 2015 The Prinz Law Office. All rights reserved. The Prinz Law Office Silicon Valley, CA Los Angeles, CA Orange County, CA San Diego, CA 35
I. Drafting and Negotiating Key Provisions in the SaaS Agreement G. Other Critical Provisions 3. Customization Services (a) Defining Customizations Required (b) Defining Scope of Work, Timetable for Completion, and Milestones (c) Structuring Customization Fees and Payment Schedule 2015 The Prinz Law Office. All rights reserved. The Prinz Law Office Silicon Valley, CA Los Angeles, CA Orange County, CA San Diego, CA 36
I. Drafting and Negotiating Key Provisions in the SaaS Agreement G. Other Critical Provisions 4. Subscription Fees (a) Structuring Subscription Fees (b) Selection of a Start Date (c) Providing for Addition or Reduction of Users during Subscription Term 2015 The Prinz Law Office. All rights reserved. The Prinz Law Office Silicon Valley, CA Los Angeles, CA Orange County, CA San Diego, CA 37
I. Drafting and Negotiating Key Provisions in the SaaS Agreement G. Other Critical Provisions 4. Subscription Fees (c) Defining Rate Increase Policy (d) Defining Continuation of Services Policy in Event of Non-Payment (e) Defining Renewal Policy 2015 The Prinz Law Office. All rights reserved. The Prinz Law Office Silicon Valley, CA Los Angeles, CA Orange County, CA San Diego, CA 38
I. Drafting and Negotiating Key Provisions in the SaaS Agreement G. Other Critical Provisions 5. Termination (a) Defining Termination Policy (b) Defining Policy for Expungement of Data (c) Defining Data Transitioning Service Policy and Fees 2015 The Prinz Law Office. All rights reserved. The Prinz Law Office Silicon Valley, CA Los Angeles, CA Orange County, CA San Diego, CA 39
I. Drafting and Negotiating Key Provisions in the SaaS Agreement G. Other Critical Provisions 6. Disaster Recovery Policy (a) Defining disaster recovery plan (b) Defining timetable for recovery in the event of loss of services in disaster 2015 The Prinz Law Office. All rights reserved. The Prinz Law Office Silicon Valley, CA Los Angeles, CA Orange County, CA San Diego, CA 40
I. Drafting and Negotiating Key Provisions in the SaaS Agreement G. Other Critical Provisions 7. Personal Health Information Security (a) Data breach notification obligations (b) Establishing parameters on reimbursement costs (c) Defining indemnification obligation 2015 The Prinz Law Office. All rights reserved. The Prinz Law Office Silicon Valley, CA Los Angeles, CA Orange County, CA San Diego, CA 41
Recent Legal Developments and Business Trends
Pennies from Heaven : How Tax Authorities are Looking to Cloud Computing for Revenue Key Concepts Revisited Remote Access Software is housed on a server (in/out-of-state) and accessed on a computer or web-enabled device via the internet or other network. SaaS Software-as-a-Service Software on-demand, if you will. With SaaS, software and the code running that software is hosted on a server or series of servers and is access on a computer or web-enabled device. ASP Application Service Provider. An ASP is a company that is providing what amounts to remote access, software on-demand, or SaaS. Cloud Equivalents Why do the states care about the cloud? The Cloud Conceptualized How do the states fit the cloud into their concept of tangible property? 43
How Have States Developed Their Cloud Computing Guidance? Example: Washington State Remote Access Software Digital Automated Service Digital Good Software Services that use software Books, music, video, data, facts, information The Cloud 44
Overview: Survey of State Guidance on Sales Tax on Remote Access Software Statute or Regulation DOR Ruling or Policy Unofficial Position or Policy No Specific Guidance No Sales Tax 45
Income Tax - Sourcing the Cloud Is it a sale of TPP or of a service? Colorado Sale of TPP, source to delivery location. PLR 13-008 (Oct. 2, 2013). But what is the delivery location? The server? The end user s address? Illinois, Massachusetts, Pennsylvania Sale of a service, sourced to customer location. But how do you determine customer location? 46
Cloud Seeding: SaaS as (Taxable) Service: City of Chicago SaaS Tax July 2015: Department of Finance issues two Rulings. 1. Electronically delivered amusements 2. Nonpossessory computer leases Tax = 9 percent tax on certain types of online services. Second Ruling applies to remote database or computing platforms like Amazon Web Services or LexisNexis. Prognosis hazy Effective date of lease tax delayed until (at least 1.1.2016) FOR FURTHER QUESTIONS + UPDATES: WWW.TAXINGTECH.COM 47
II. Legal Developments and Business Trends B. Business Trends 1. Consequences of Increasing Data Breach Incidents (a) Indemnification and limitation of liability negotiations (b) New focus on requiring insurance 2015 The Prinz Law Office. All rights reserved. The Prinz Law Office Silicon Valley, CA Los Angeles, CA Orange County, CA San Diego, CA 48
II. Legal Developments and Business Trends B. Business Trends 2. Insurance Negotiations (a) Commercial General Liability (b) Errors and Omissions (c) Employee Liability (d) Automobile Liability (e) Cyberinsurance 2015 The Prinz Law Office. All rights reserved. The Prinz Law Office Silicon Valley, CA Los Angeles, CA Orange County, CA San Diego, CA 49
Contact Information: Kristie D. Prinz, Esq. The Prinz Law Office Silicon Valley Locations: Los Gatos: 20 S. Santa Cruz Avenue, Suite 300 Los Gatos, CA 95030 Sunnyvale: 1250 Oakmead Parkway, Suite 210 Sunnyvale, CA 94085 Email: kprinz@prinzlawoffice.com Telephone: 408.884.3577 Website: www.prinzlawoffice.com Software Law Blog: www.siliconvalleysoftwarelaw.com 2015 The Prinz Law Office. All rights reserved. The Prinz Law Office Silicon Valley, CA Los Angeles, CA Orange County, CA San Diego, CA 50