Companies all over the world are concerned as well as unsure about the impact that Brexit will have on their operations, which may not be directly linked to cross-border trade. According to media reports, the UK exported about £220 billion worth of goods and services to the rest of the European Union (EU) in 2015, while the rest of the EU exported around £290 billion to the UK.
For the Software and IT Services (SITS) industry, Brexit may have a profound impact. The UK SITS market is estimated to be worth around £46 billion in 2016, which is more than 43% of all creative industries. Post Brexit, these numbers could be significantly affected as cross-border license agreements and free trade will no longer exist. One area of concern for businesses should be technology and software procurement, which could potentially have a critical impact due to the dependence on technology of most businesses.
Software users get affected
The impact will require an immediate assessment by software publishers as well as end users, as many of the cross-border allowances and flexibility would cease to exist post Brexit. Software publishers need to now check how this will affect the use of their intellectual property (IP) by their affected customers. Publishers will also have to shoulder responsibility to educate their customers on the risks of potential non-compliance, especially around the use of cross-border licenses. Companies that are end users and have cross-border businesses will have to assess the details of their contractual agreements and purchases. They will also need to conduct assessments of their expected usage and take steps to ratify any issues that may come up due to the effect of Brexit.
“Since Brexit will impact free trade access, we are already in the process of analyzing the impact. We have started evaluating our software license agreements, particularly around the usage clauses to make sure that we are well covered after Brexit. Some agreements may require re-negotiation, which are being discussed with the publisher.”
Software Asset Manager for a global corporation with UK & EU operations
Cost increase for companies with operations in the UK
Trade barriers between the EU and the UK are likely to increase, with a direct proportion of costs and level of trade. This means that the costs of UK companies would increase when trading with Europe. It is important to assess the commercial impact on contract agreements that cover companies using software licenses within the UK and the EU under the same master agreement, as some of the cross-border allowance and flexibility may not be available after Brexit.
Impact on Intellectual Property Rights (IPR)
The EU law is part of the UK law, and its adoption has given EU citizens, companies and public authorities’ rights and duties. Post Brexit, there are chances that the UK law may separate from the EU law. There will be a major difference if such a situations occurs, since UK law is more aligned to the country-based framework compared to the EU law, which is based more on continental-focused framework. In the short-term, IPR governed by the UK law could potentially override EU rights. The ownership of IPR rights may be affected as EU courts will not bind UK courts. This may have a significant effect on the IPR related to work products for specialised software such as developer tools, Computer Aided Designing/ Computer Aided Manufacturing (CAD/CAM) software, analytics platforms etc. In light of these anticipated changes, software contracts that cover IPR would have to be reviewed. When such software and its work products are hosted on a cloud outside the local region of the user, it could then add to the complexity around interpretation of ownership.
“Since free trade access will cease to exist once Brexit comes into effect, we will have to look into our agreements with our customers to check how cross-border usage of licenses will get affected.”
Head of license compliance for a global software publisher
Cross-border impact of taxes and duties on software license agreements
The extent to which prices should include or exclude any new taxes, duties or other similar levies that the UK Government or the remaining EU member state governments may introduce after Brexit takes effect will have to be considered while negotiating contracts. This could cause an immediate increase in the cost of licenses of certain companies based in the UK.
Impact of exchange rate variations on software license costs
After the announcement of Brexit, the British pound has dropped more than 30% in value against the US dollar. When negotiating new agreements between the UK and the EU, the risk of future changes in the pound’s value may have to be considered. For example, some global software publishers have already announced price increases beginning January 2017 due to Brexit. Other big publishers are to follow suit.
“Brexit on software licensing as end users and publishers prepare for their contract negotiations. The actual situation needs critical assessment. As a global industry body, we are having discussions with end users and publishers around the impact of Brexit. We are receiving many questions from businesses as well as end users. Since Brexit is going to take effect soon, this is the right time to have discussions around the impact with all the stakeholders involved. A proactive and timely approach would ensure that businesses do not end up being non-compliant, else there may be a rise in disputes related to software license contracts.”
President of a global professional association in the field of software license compliance
What needs to be done?
Both software users and publishers are likely to be affected by Brexit. They will benefit from undertaking some proactive steps to mitigate risks and save costs. Some of these steps are:
- Conducting complete sanity checks for license contracts by software users from a post-Brexit perspective including cross-border usage
- Examining agreements by software publishers and how Brexit will impact the use of their IPR
- Reviewing and amending relevant terms and conditions directly or indirectly affected by Brexit by both end users and publishers
- Documenting the post Brexit processes and educating teams that manage software contracts around do’s and don’ts and consultation points
- Evaluating new technologies for license consolidation and optimisation such as virtualization and cloud
If any key contracts are likely to be affected by Brexit, amendments to terms that are materially affected could be considered for re-negotiation. It is also worth considering whether the contract contains any remedies that could be triggered by Brexit; these could include:
- Provisions that allow contract re-negotiation or termination if prices change substantially or the contract becomes unprofitable for one party
- An ability to terminate for illegality
Software license compliance in itself is a complex undertaking. Many companies deal with dozens of contracts per vendor, which can have cascading implications over the years from a qualitative as well as quantitative side. Post Brexit, stakeholders will have to evaluate their present compliance situation, make changes to contracts and understand its impact on future compliance. Being proactive is the key to mitigate future risks related to non-compliance and financial exposure.
Paul Walker, Head (EMEIA), Forensic Technology & Discovery Services, EY has co-authored the above article.