Software licensing agreements have become essential instruments in the world of technology, being pivotal in both commercial and non-commercial sectors. This article will delve into the key principles to consider when negotiating software licensing agreements.
What is a Software License?
Let’s begin by establishing a common understanding of a software license. Put simply, a software license is a permission granted by the owner of software rights (licensor) to another individual or entity (licensee) to utilise the software in a specified manner. The license outlines the limitations and restrictions on the licensee’s usage of the software.
Types of Software Licenses
Understanding the various types of software licenses is the first step towards understanding which software license you should use. Here are some of the most common types:
End-User License Agreement (EULA): A EULA, is the most common type of software license. It typically grants the user just enough rights to operate the software and little else. The “end user” could be an individual or a company, with multiple employees utilising a single license. Alternatively, a business might employ a multi-user license, where each employee receives their own EULA. Apple’s iOS is a classic example of software that uses a EULA. Setting up an Apple device requires accepting Apple’s EULA, which details how you can use the software. For instance, Apple’s EULA prohibits users from installing the iOS software on non-Apple-branded devices, thereby restricting the software’s use solely to Apple hardware.
Mobile Application License: This is a variant of EULA specifically for mobile device software. These licenses must meet mobile app stores’ standards (like Google Play or Apple App Store). They might also include extra conditions to conform to privacy rules regarding user data, such as phone geolocation tracking.
Site License: This type of license allows a software product to be used in a specific location, such as an office. It is typically used by businesses and allows for the software to be installed on multiple computers within a specified location.
Enterprise License: This license is similar to a site license but is not restricted to a single location. An enterprise license allows for the software’s use across an entire organisation, offering flexibility for businesses with multiple locations.
Open Source License: These type of licenses promote software transparency by allowing public access to the software and its source code for studying, modification, and distribution. They fall into two categories: Permissive, such as the MIT and Apache licenses, which have minimal restrictions and allow the software to become closed-source in future versions, and Copyleft, like the GNU GPL, which insists that any derivative works also remain open-source. These licenses foster community collaboration while ensuring software openness.
Software and Version Definition
Defining the software and its version precisely is crucial in software licensing agreements. This provides clarity on the license’s scope and minimises potential disputes, especially with software that frequently updates. Indicating whether the license and the pricing covers future updates and versions avoids confusion over upgrade rights.
Scope of License
The scope of a software license agreement delineates the rights granted to the licensee regarding the use of the software. It outlines how, when, and by whom the software can be used. The following points are some of the most typical license scope terms:
Payment Terms: Payment for license rights is generally outlined in the software license agreement, unless it is a single upfront payment, like when purchasing software or a video game on CD. While this was the usual method for years, nowadays, subscription-based models are more prevalent. In this setup, the software license is given for a set term, with ongoing usage requiring further payments. This is particularly applicable to Software- as- a Service agreements.
Usage Rights: Specifies whether the license is exclusive or non-exclusive. An exclusive license means the licensee is the only entity with the right to use the software, while a non-exclusive license allows the licensor to grant the same rights to other licensees.
Reproduce: Relates to the right to make copies of the software. The licensing agreement might sanction the creation of one copy, multiple copies, or— a provision often found in Enterprise License Agreements— as many copies as required for the licensee’s business activities.
Number of Users or Devices: Defines whether the license is for a single user, multiple users, or unlimited users. It may also restrict the software’s use to a specific number of devices.
Use Restrictions: Just as the licensor can limit who can use the software, they can also impose restrictions on how the software is used by the licensee. For instance, the licensor may confine the licensee’s software usage to internal operations only.
Territory or Site: This scope term of a software license agreement typically limits the rights of usage to specific locations, which are often geographical but can occasionally be defined by industry sectors.
License Duration: Perpetual vs Non-Perpetual: A software license agreement’s duration should specify if it is perpetual or non-perpetual. A perpetual license grants the licensee indefinite usage rights, subject to adherence to the agreement’s terms. However, breaches can lead to termination, despite the license’s ongoing nature. In contrast, a non-perpetual license is time limited. A popular non-perpetual license is a monthly subscription Software -as- Service for could- based software, If the licensee does not pay the monthly fee, the license terminates. Salesforce is an example of Software-as- Service offering a cloud-based CRM platform for sales, marketing, and customer support.
Revocability: If a license is described as “irrevocable,” it means the licensor cannot revoke it. However, Irrevocable licenses are relatively rare and typically granted when the licensor acts as a subcontractor to a licensee engaged in work for a third party, such as an end user or government entity. Even perpetual licenses, which have no end date, typically contain clauses that allow for termination due to licensee misconduct.
Sublicense: A software license could allow sublicensing or sharing rights with others. This is different from “distribution,” which is about hand out copies of the software. Although these two terms can sometimes be confused in contracts, it is crucial to differentiate them. If sublicensing is allowed, it needs to be explicitly stated in the agreement.
Modify or Create Derivative Works: Specifies whether the licensee can modify the software or create derivative works.
Specifications describe software and computer systems, outlining their intended functions. Despite their crucial role, they often get overlooked during contract negotiations. Their importance extends beyond mere descriptions, as they frequently form the foundation for other contract clauses. Consider, for example, a warranty clause: “The Licensor warrants that, for the first 12 months following the Effective Date, the Software will operate in accordance with the specifications detailed in Attachment A.” Without the inclusion of specifications or if they are not clearly defined, such a clause will fall short.
Intellectual Property Rights
The intellectual property rights clause specifies that all intellectual property related to the software remains with the licensor. This includes copyright, trademarks, patents, and trade secrets. It also often prohibits reverse engineering, decompiling, or disassembling the software. The licensee must understand that they are buying a license to use the software, not the rights to the software itself. A strong intellectual property rights clause can protect the licensor from unauthorised use or distribution of their software.
Maintenance and Support
This part of the agreement defines what level of support the licensee can expect from the licensor. This can include updates, bug fixes, and technical support. This section should also outline whether these services are included in the initial license fee or if additional payments are required. Providing clear information about maintenance and support responsibilities can ensure the licensee knows what to expect and can prevent dissatisfaction or disputes in the future.
Compliance and Audit Rights
Many software licensing agreements include a clause allowing the licensor to verify the licensee’s compliance with the license terms. This could involve audits or inspections, either conducted remotely or on-site. This right helps to protect the licensor and ensure that the software is being used as agreed. It’s crucial to define the frequency of such audits, who will bear the costs, and how the audits will be conducted to prevent any misunderstanding or misuse of these rights. If the audit uncovers any misuse of the software, the licensor retains the right to charge additional license fees and seek damages under copyright laws.
Data Protection and Privacy
In our increasingly digital world, data protection and privacy are growing concerns. The agreement should clarify what data the software will collect, how it will be used, and how it will be protected. This may also include how the software complies with relevant privacy laws and regulations, such as GDPR in Europe. Ensuring robust data protection and privacy provisions can protect both parties from potential legal issues and help build trust with users.
Software licensing agreements are complex but indispensable in the world of technology. They regulate the use of software, protect intellectual property rights, and manage the relationship between the licensor and the licensee. Although they can seem daunting, a strong understanding of software licensing agreements and their key principles can safeguard your interests, whether as a software provider or user.
This article is for general informational purposes only and should not be construed as legal advice.