Information Technology- Germany Decision
Application service provision (ASP) is a popular and widely used business model. Recently some major players on the IT market started to offer software applications on an ASP basis. This new approach to the distribution of software has the potential to revolutionize the software market. For example, Google has launched its office software via ASP and some major companies, such as General Electric and Procter & Gamble, have procured standard software based on ASP. Adobe Systems plans to provide internet users with access to its Photoshop picture-editing software.
In a judgment dated November 15 2006 (Az XII ZR 120/04), the Federal Court of Justice clarified some important legal aspects relating to ASP. In particular, the ruling clearly states that software must be treated according to the provisions of the Civil Code on tangible goods (which was previously disputed). This provides clear guidelines on various issues of practical importance. According to the court, ASP contracts trigger the applicability of the statutory provisions on rental law (Sections 535 and following of the Civil Code). However, additional services such as hotline services - which are often provided together with ASP under one contract - fall under the respective provisions of the Civil Code that fit best (eg, in the case of hotline services, the statutory provisions regarding service contracts). Hence, ASP agreements are often governed by different types of contract law, depending on the nature of the relevant obligation.
Implications
The court's ruling provides a clearer basis for ASP contracts. The following issues in particular should be considered when drafting ASP contracts.
Burden of proof
As a result of the application of rental law, the burden of proof regarding the defect-free nature of the software rests with the ASP service provider up to the moment of the first provision of ASP services. Subsequently, the burden of proof shifts to the user. However, this shift of the burden of proof requires that any necessary special introduction to the software be given to the user by the service provider.
Availability
Another important consequence is that the applicable statutory law triggers the obligation of the ASP service provider to ensure that the software is fully functional at all times. Accordingly, standard maintenance contracts which commit the user to pay an additional maintenance fee on top of the ASP fee are in principle not permissible and may be void, particularly if they are based on standard terms and conditions. Hence, from a legal perspective, it is recommended that service providers factor in any costs for maintenance when calculating the ASP fee.
Furthermore, service providers should be aware that rental law obliges the service provider to ensure 100% availability of the software within the agreed service times. Although this statutory obligation may be altered by way of contractual service levels, the risk remains that such contractual limitations will be considered void in standardized contractual provisions. Under German law, a contractual provision is considered to be standardized if it is drafted for more than one occasion and is not individually negotiated. If the software is not 100% available, the customer has a statutory right to reduce the ASP fee, despite 100% availability being virtually impossible to achieve.
Copyright law
If a service provider does not offer its own software but purchases software from a third party in order to market it via ASP (or to integrate it into its own software), it is of particular importance whether the service provider's right of use, as acquired from the software developer, includes the right to market the software via ASP. Unfortunately, the court's decision does not deal with this copyright issue. Hence, under German copyright law it is still unclear whether ASP is covered by a normal licence to use the software or whether a special licence is needed. In view of this uncertainty, it is highly recommended to make sure that any licence purchased by a service provider explicitly includes the right to market the software by way of ASP.
On the other hand, a persuasive argument in legal literature holds that the user of ASP software requires no licence to use the software via ASP because no copies of the software are running on the customer's system - merely the screen image is reproduced, which is generally not copyright protected. Hence, the user of ASP software does not require a licence from the service provider. However, this issue has not been confirmed by case law and consequently, as a matter of precaution, any user should insist on obtaining the explicit right to use the ASP software.
International Law Office | 
