Master Subscription Agreements Explored
When examining business contracts in the software industry, especially in the Software as a Service (SaaS) and general technology sectors, it is important to understand the various terms and forms of agreements that are frequently used.
A master subscription agreement is a principal contract, often including various addendums, that establishes a licensing relationship between a customer and a software or technology provider. This agreement will typically provide a description of services, pricing information and other details relating to the projected use of the software and/or technology product.
The purpose of establishing a master subscription agreement is to attempt to "set the stage" for the relationship between the involved parties so that "like" agreements do not have to be drafted for each individual sale or installation. This can be extremely helpful in avoiding arbitrary modification of the most favorable terms by the more powerful party in a given business relationship. In the event of negotiation for a few high volume sales simultaneously , a master agreement can dictate terms across multiple transactions and lay the groundwork for the long-term relationship between the parties.
In a SaaS environment, a master subscription agreement can establish terms for a service provider’s software to be installed "in the cloud" so that users can access it remotely. The agreement would set out the various subscription levels, the prices for each level and limit of support for different levels, as well as allowing for the inclusion of provisions to add additional yearly licenses.
Establishing a master subscription agreement is a good idea in most business relationships to eliminate uncertainty and confusion. The terms of a contract are vital to defining the rights and responsibilities of the different parties. Having a clear set of pre-established terms will make future negotiation much easier.
Essential Components of Master Subscription Agreements
In general, a master subscription agreement may also incorporate the following elements:
Subscription Terms
A description of the service being provided. Although many subscription documents provide fairly detailed descriptions of the technologies involved in product manufacture or service provisioning, those details are often less relevant for subscription agreements. Because the technologies evolve constantly, the relevant information includes a description of functionality as opposed to specific technical terms. For example, a software subscription agreement can refer to specific features of the software and a description of the general functionality. Products involving a subscription service may also include a description of functionality. The benefit of these types of descriptions is that such language is less likely to become outdated.
Fees and Payment Terms
A description of the fees and payment terms. The agreement should address the term of the subscription, the ordering process, billing process, and the payment terms. In addition, pricing for additional products or services, if any, should be addressed. Payment terms should be consistent with the ordering process and the business rules of the parties. One issue that a party may consider when it decides the appropriate payment terms is whether it offers payment in advance of service. With advance payments, a party can minimize risk and can offer discounts. However, advance payment terms can limit flexibility for the parties.
Data Protection
Terms for handling customer or other proprietary data. For example, an agreement may address the location of data centers or provide access terms for the parties’ data. Such terms can be quite detailed, but often will not become outdated over time. Data center locations and access should be described generally, including any restrictions on access (for example, customers may require that service providers agree to restrictions on access in certain countries). When data being processed is sensitive (e.g., health or financial data), additional terms regarding storage, access, and security can be included.
Liability
Limitation of liability terms. Parties may agree on overall liability caps on damages for claims under the agreement. The caps are often quantified as four or six times the subscription fees. Exclusions from the caps can be broader than exclusions from liability (such as confidentiality obligations). Exclusions from the limitation of liability caps can be tailored to the specific circumstances of the parties’ relationship.
Advantages of Master Subscription Agreements
Clients and service providers are able to avail themselves of the significant advantages presented by a master subscription agreement. Both parties benefit through the reduced time and expense associated with drafting a multitude of separate agreements. Instead, a single document is used that is applicable to all subscription transactions, resulting in an effective simplification of the business transaction and a rationalization of how the communications and transfer of information between the respective parties is handled.
In addition, the standardization of the terms in the agreement for subsequent subscription transactions reduces risk for both parties. This results not only from reducing the time and expense of localizing the subscription agreement, but also from the ability to address specific issues (such as compliance with regulatory requirements) on a case-by-case basis where necessary. The solution offered by a master subscription agreement, therefore, is to produce collective streamlined agreements, with the advantages of standardization, with wholesale, retail, and peripheral services.
Master Subscription Agreement Issues
Despite the benefits, businesses must navigate several challenges with master subscription agreements. One common problem arises when a subscription agreement provides for pricing based on annual averages but sells to individual consumers or other similarly sized customers. Such pricing may not account for marketplace realities. For example, the contract may allow for price increases based on a consumer’s "average usage" and charge overage fees for any exposure over that annual average consumption. The result may be a frustration of the customer’s expectations. For businesses that target individual consumers, average usage pricing is difficult to track and administer, since it requires tracking the subscription for each user and averaging the use levels. Much more common is pricing based on volume, or a discount off the regular price.
Another challenge arises when one side has no leverage in securing a mutually-beneficial deal. For example , with some companies, a provider or vendor’s standard agreement contains highly skewed pricing, a long initial term, onerous termination and cancellation terms, and weak service performance standards, all to the point that accepting the terms makes business growth uneconomical.
Businesses also struggle with unconscionable terms, especially when a single supplier takes most or all of the business in one area. Other difficulties may arise where a master subscription agreement is actually like a master purchase agreement, when it is intended to be used for an exchange of services but uses unconscionable language, or when one side drafts the agreement and the trade in the exchange is wildly uneven, with multiple service references throughout.
Other issues include the use and negotiation of a master subscription agreement at the beginning of a negotiation when the agreement does not have mutual liability caps.
Drafting a Master Subscription Agreement
A master subscription agreement is usually entered into over the internet, through online portals that allow users to simply click on boxes to enable the right to use professional services. It is essential that the agreement be carefully drafted to avoid future disputes and loss of revenue. Both parties need to negotiate without misunderstanding its import. The client should understand what services it and any user are entitled to. The service provider should receive timely payment in a form and way it wishes. This is deceptively simple as it can be quite difficult to create an agreement that protects both parties properly.
There are a number of key considerations for both sides of the transaction that should be followed when creating a master subscription agreement.
The agreement should provide details on the service the provider enables users to access, including: (a) the scope of the service, such as modules, sub-modules or levels of service; (b) the location of the computers that must be accessed; and/or (c) the professionals the provider has identified to provide the service and/or the number of clients the former can service.
The agreement should accurately describe the pricing terms, such as: (a) the amount due and frequency of payments; (b) discounts for subscriptions that extend over the next fiscal period; (c) penalties for late payment; (d) late fees; (e) accelerations; (f) limitations on price changes.
The agreement should require a minimum commitment; should identify a renewal period and process; and any notice period that must be followed.
It is preferable to include the obligations of the parties, such as: (a) payment in accordance with the provisions set forth above; (b) each party’s obligations under the agreement; (c) the delivery dates of the service; and (d) that notice must be given if the service is not meeting requirements.
Master subscription agreements often include provisions relating to the jurisdiction chosen to resolve disputes, the governing law, and venue. The jurisdiction alternative often depends on the circumstances. If one side is significantly more powerful than the other, the choice is generally more obvious.
Because the agreement is essentially a contract for the future, it needs to include a detailed termination provision that includes: (a) all termination rights; (b) a notice period for both sides and the format for notifications; (c) the minimum service levels and penalties for failure to comply, if any; (d) a list of the actions that must be completed upon termination, including the delivery of information from one side to the other; and (e) allocation of responsibility to each party for any penalties that may be levied by third parties.
There should be a provision that includes how the agreement may be amended or modified; and that any waiver cannot be construed as a waiver of any future rights. Waivers should relate only to specific portions of the agreement.
Finally, the agreement should include a provision mandating how claims and disputes should be resolved, including the language on arbitration, litigation and damages, and the recovery of fees.
Master Subscription Agreements and Legal Consequences – Overview
Given the widespread use of subscription-based services, many customers will encounter Master Subscription Agreements. When an organization engages with a SaaS provider that uses a Master Subscription Agreement, they must review it and its terms and conditions. Failing to do so can result in unforeseen liabilities or assumptions of risk. For example, if a customer uses a subscription service without allocating their use to the correct category – such as personal or sensitive data, where the laws may require that such data is not stored unencrypted or without consent – a right of audit clause could exist for a SaaS provider to audit the surroundings of this data, resulting in the need to immediately decommission and recall all data as it exists.
Depending on a company’s industry, they may have specific regulatory requirements that fall under their laws that may come into play in a Master Subscription Agreement . For example, in the financial industry, a bank could be storing sensitive financial information regulated by laws such as the Bank Secrecy Act, Gramm-Leach-Bliley Act and Payment Card Industry Data Security Standards. In the health sector, medical data is also highly regulated. Analyzing which laws apply on a case-by-case basis is critical.
To determine the exact implications of such agreements, it is important for the appropriate parties within an organization to become involved. Companies should always involve their legal and compliance teams when evaluating a Master Subscription Agreement to ensure that there is a consistent and thorough approach to contracts, which can include the evaluation of relevant obligations, internal policies, risk management, and data flows. It is also highly recommended that legal counsel be involved to review any applicable state and federal laws which could impact the obligations, risks and costs to comply with the Master Subscription Agreement so that customers have a sound understanding of what the agreement means for them.