Insight

Bringing Cloud Liability Down to Earth

Unlike most traditionally licensed software, cloud solutions also put the customer at risk by transmitting, storing, and processing the customer’s data outside of the customer’s networks.

Cloud Liability
JM

Jim Steinberg and Lance McCord

December 19, 2017 02:29 PM

The cloud is everywhere. In just a few years, business use of hosted and distributed solutions has moved from the margins to the mainstream in a wide variety of fields. This growth has created demand for customer-side expertise in negotiating cloud contracts. The nature of cloud solutions and the efficiencies they yield impose limits on customers’ flexibility to address some traditional software licensing concerns while presenting unique, additional risks for customers. Advisors who understand what is on (and off) the table can set informed expectations for their clients, offer meaningful advice about the risks and benefits of choosing the cloud over its alternatives, and run effective, efficient negotiations with cloud vendors.

Cloud service customers contend with issues that arise in traditional software licensing, such as the risk that a solution does not work as anticipated, is not ready by the customer’s deadline, or infringes a third- party’s intellectual property rights. But some of these issues may be handled differently in the cloud. For example, because cloud vendors usually offer a standardized solution to all customers, they rarely agree to terms that would require changes to hardware, software, or processes for a single customer.

Cloud vendors can negotiate over non-operational issues, such as pricing, indemnity, and liability caps. But customers should keep this trade-off in mind: with the lower cost of cloud-based solutions, the customer can expect increased risks, and some loss of flexibility. For example, damage caps in cloud services agreements tend to be lower than in agreements for comparable on-premises software.

Cloud customers also face potential liability that licensees under more traditional software arrangements do not. Cloud customers do not possess a copy of the software, and unlike licensees of on-premises software, the cloud customer’s access to the software could end in a moment. Vendors can use the “on/off switch” to generate leverage over the customer in disputes and renegotiations, so the cloud customer should negotiate terms that specify when it is acceptable for the vendor to terminate or suspend the solution. Or the solution could simply disappear due to a distant force majeure event, a risk that adds new complexity to the customer’s disaster and business continuity planning.

Unlike most traditionally licensed software, cloud solutions also put the customer at risk by transmitting, storing, and processing the customer’s data outside of the customer’s networks.

The vendor is unlikely to customize its data security regime for a single customer, but the parties can establish the privacy and security standards that the cloud solution must meet in the contract, provide for periodic independent certification or security audits to verify that these standards are in place and effective, establish processes that the vendor will follow if there is a security breach, and allocate responsibility for liability stemming from the breach. The customer should also understand when and how it will have access to its data throughout the term and negotiate for the right to receive a complete set of data in a useful format at the end of the term.

Service level commitments with meaningful remedies can help to mitigate some of the unique operational risks presented by cloud services, but customers should be aware that requests for custom service levels are likely to be met with blank stares. Customers should ensure that the service levels include meaningful remedies, allow the customer to terminate for very poor performance, and do not allow the vendor to avoid responsibility for warranty breaches by paying small service level credits.

When business and legal advisors know the cloud playing field, their clients will understand their liability exposure and can contract accordingly.

Related Articles

Into the Breach


by John Ettorre

Data breaches have become inevitable. Here’s what you can do to respond.

Data Breaches

How Does Your Firm Measure Up?


by Best Lawyers

BL Intelligence provides your firm with valuable industry data.

Best Lawyers 27th Edition Stats

2019 Women in the Law at a Glance


by Best Lawyers

2019 "Women in the Law" by the numbers.

What Practices Grew the Most in 2019?

My Data My Rules: An Overview of Data Protection in Brazil


by Fábio Pereira

My Data My Rules

Are You Equipped to Manage the Internet of Things?


by Morgan Gebhardt

Are IoT technologies nice-to-have “apps” or necessary business components?

Manage the Internet of Things

Trending Articles

A Celebration of Excellence: The Best Lawyers in Canada 2024 Awards


by Best Lawyers

As we embark on the 18th edition of The Best Lawyers in Canada™, we are excited to highlight excellence and top legal talent across the country.

Abstract image of red and white Canada flag in triangles

The Long, Short, Thick and Thin of It


by Avrohom Gefen

“Appearance discrimination” based on employees’ height and weight is the latest hot-button issue in employment law. Here’s a guide to avoid discrimination.

Woman stands in front of mirror holding suit jacket

Trailblazing Titans of the Industry: Announcing the 4th Edition Best Lawyers: Ones to Watch® in America


by Best Lawyers

Best Lawyers honor and celebrate these talented, innovative newer lawyers who are trailblazing their way to victories in courtrooms across the country.

Connected web above map of the U.S.

Announcing the 2023 The Best Lawyers in America Honorees


by Best Lawyers

Only the top 5.3% of all practicing lawyers in the U.S. were selected by their peers for inclusion in the 29th edition of The Best Lawyers in America®.

Gold strings and dots connecting to form US map

Pearls of Wisdom: Celebrating 30 Editions of Best Lawyers’ Rankings


by Best Lawyers

In celebration of our landmark 30th edition, Best Lawyers’ leadership explains how the world’s original and most trusted legal awards maintain their esteem, integrity and reputation for excellence among the top legal entities and their clients.

Best Lawyers logo for 30th edition release with gold glitter in background

Vanguards of Victory: Best Lawyers: Ones to Watch in Canada 2024


by Best Lawyers

The third edition of Best Lawyers: Ones to Watch in Canada™ has been announced, and the lawyers showcased by these awards are rising to the challenge each day as advocates for clients all across the country.

Blue and black background with small squares connected by lines

Best Lawyers: Ones to Watch in America for 2023


by Best Lawyers

The third edition of Best Lawyers: Ones to Watch in America™ highlights the legal talent of lawyers who have been in practice less than 10 years.

Three arrows made of lines and dots on blue background

IN PARTNERSHIP

Thomson Rogers: Toronto Personal Injury Lawyers


by Thomson Rogers

Since establishment in 1935, Toronto-based firm Thomson Rogers has consistently delivered results for their clients struggling through complex litigation.

Top of a Staircase Featuring Two Large Black Doors with Bookshelves and Chairs on Each Side

Announcing the 2023 The Best Lawyers in Canada Honorees


by Best Lawyers

The Best Lawyers in Canada™ is entering its 17th edition for 2023. We highlight the elite lawyers awarded this year.

Red map of Canada with white lines and dots

The Best Lawyers in South Africa™ 2023


by Best Lawyers

Best Lawyers proudly announces lawyers recognized in South Africa for 2023.

South African flag

IN PARTNERSHIP

How Long Does a Felony Stay On Your Record in California


by Peter Blair

A felony can remain on your record for life in California. Some felonies qualify for expungement. Learn how to remove a felony conviction from your record in California.

Hand setting bird free out of a guarded fence

What the Courts Say About Recording in the Classroom


by Christina Henagen Peer and Peter Zawadski

Students and parents are increasingly asking to use audio devices to record what's being said in the classroom. But is it legal? A recent ruling offer gives the answer to a question confusing parents and administrators alike.

Is It Legal for Students to Record Teachers?

Announcing the 2022 Best Lawyers® in the United States


by Best Lawyers

The results include an elite field of top lawyers listed in the 28th Edition of The Best Lawyers in America® and in the 2nd Edition of Best Lawyers: Ones to Watch in America for 2022.

2022 Best Lawyers Listings for United States

The Upcycle Conundrum


by Karen Kreider Gaunt

Laudable or litigious? What you need to know about potential copyright and trademark infringement when repurposing products.

Repurposed Products and Copyright Infringemen

The Best Lawyers in Australia™ 2024 Launch


by Best Lawyers

Best Lawyers is excited to announce The Best Lawyers in Australia™ for 2023, including the top lawyers and law firms from Australia.

Australian Parliament beside water at sunset

Wage and Overtime Laws for Truck Drivers


by Greg Mansell

For truck drivers nationwide, underpayment and overtime violations are just the beginning of a long list of problems. Below we explore the wages you are entitled to but may not be receiving.

Truck Driver Wage and Overtime Laws in the US