In Microsoft Audits, Don’t Forget About True-Up Rights

Following the conclusion of a software audit, Microsoft’s standard practice is to require an audited company to purchase licenses associated with calculated “unlicensed use” within a set period of time (typically, 30 days) following receipt of Microsoft’s settlement demand. However, it is important for companies with Enterprise Agreements to keep in mind the fact that their EA enrollments may include true-up rights that could result in deferring certain incremental license purchases either indefinitely or until the next true-up order.

For example, many companies use Enterprise Enrollments to license sets of “Enterprise Products” (typically, Windows OS upgrades, Office and CALs for server products like Exchange) across their enterprises on the basis of device counts or user counts. For those products, the Enterprise Enrollments often state that, at an annual true-up order, the licensee must “determine the number of Qualified Devices and Qualified Users…at the time the true-up order is placed and must order additional Licenses for all Qualified Devices and Qualified Users that are not already covered by existing Licenses…” Older versions of other EA enrollments – such as the Enrollment for Application Platform – sometimes included similar language for the products licensed under those agreements.

My interpretation of such agreements is that products falling within the scope of such true-up obligations requiring orders based on current usage (as of the true-up deadline) should not be subject to immediate, post-audit license orders, because such excess usage is not really “unlicensed use.” The enrollments plainly contemplate that a licensee’s usage may exceed previously ordered levels, and they specify that any excess use may be addressed (either by truing up or by decreasing usage) at certain times. Microsoft therefore should have no right to require a license purchase for such products immediately following an audit unless, perhaps, Microsoft could demonstrate that the licensee previously failed to satisfy its true-up obligations.

However, that opinion comes with a number of caveats:

 Microsoft’s audit teams may be inclined to vigorously reject such arguments (especially if affected products comprise a significant portion of the audit findings). Audited companies therefore should work closely with legal counsel to confirm that the actual terms of their agreements would support the argument.

• The language in question may not apply at all to “Additional Products” ordered under an enrollment (which are products not licensed enterprise-wide). Therefore, it is necessary to carefully track the audit findings to the products ordered in order to determine whether the argument would apply in a particular audit situation.

• Newer agreements often contain different language. Many of Microsoft’s more recent form enrollments contain language that require licensed products to be trued up based on the “maximum” usage levels since the previous order. Under those circumstances, Microsoft may have more leverage to force a quicker purchase. (However, even with that language, while the company may not have an opportunity to “true down” before the next order, it may still be able to defer that order until the next true-up.)