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Software License Agreements

Software license agreements raise important considerations for both software licensors and licensees. For software licensors, a software licensing arrangement can generate significant revenue and the licensor's ownership and control of its intellectual property (IP) rights in the software are typically paramount. For software licensees where the licensed software's use can be critical to the licensee's business operations, the scope of the license and any restrictions on use are key.

Given these types of concerns, it is important for each party to understand the key issues and tailor the software license agreement to suit the particular transaction. This article addresses issues arising in on-premises software licensing when drafting or negotiating a software license agreement for off-the-shelf software (as opposed to customized software).

License purpose

Before entering into a software license agreement, each party should evaluate and determine the purpose of the license to identify its objectives in entering into the software license agreement, how the license fits into its overall software licensing strategy, and how it affects any current or future licenses.

These considerations provide context for the agreement and allow counsel to evaluate and determine the relative importance of the software license agreement's various provisions and each party's negotiating position and leverage.

The licensor and the licensee each have unique considerations. The licensor should consider:

  • Whether the license's primary purpose is revenue generation and the licensor's business model for revenue generation  — such as direct licensing to end users or using software distributors that either resell the software on a stand-alone basis or bundle the licensor's software with other software or equipment.
  • Protection of the licensor's proprietary software as IP.
  • Business factors.
  • Strategic goals. 
  • Whether any elements of the software are proprietary to other parties or contain open-source software components. If so, the licensor should evaluate the impact of any necessary flow-down provisions in the agreement and how they impact the licensor's contracting strategy.

The licensee should consider:

  • Its intended uses of the software.
  • The software's specifications and whether its functionality meets the intended users' needs.
  • Whether use of the software is critical for the licensee's business operations.
  • The software's interoperability with the licensee's IT infrastructure and environment and whether any development or customization is required for interoperability.

Types of software license agreements

Software license agreements vary widely and are based on many different factors, including the type of software being licensed. A software license agreement can be:

  • Non-negotiated, in a shrinkwrap or clickwrap form.
  • Negotiated.
  • Referred to as an end user license agreement (EULA).

Licensors typically license mass-marketed, off-the-shelf software under non-negotiated, standard shrinkwrap or clickwrap agreements. Shrinkwrap agreements are formed when the user affirms consent to a printed agreement by opening the clear, plastic, shrink-to-fit wrapper that seals the product.

Under a clickwrap agreement, the user is presented with the agreement terms onscreen and required to take a specified onscreen action (for example, clicking on an “accept” button) to affirm consent to be bound by those terms.

Negotiated software license agreements vary in many respects. In particular, variances in the scope of the license grant and the type of use are most typical and can impact the agreement's financial terms. In contrast with consumers of off-the-shelf software, businesses that license enterprise or other multi-user software may insist on negotiating all or certain terms of their software license agreements by using the licensee's own form or modifying the licensor's standard form in a negotiated agreement.

A EULA is an agreement between the software licensor and an end user, which can be an organization or an individual. Typically, EULAs are presented in clickwrap form. Software licensors also often use EULAs in the software distribution context.

Drafting and negotiation

Parties should consider several key issues when negotiating and drafting software license agreements.

  • The scope of the license grant. The license grant is the central provision in a software license agreement. It should precisely define the scope of rights granted to the licensee, including:

    • licensed software and related documentation;

    • licensed party or parties;

    • licensed rights and permitted uses;

    • the extent of exclusivity;

    • whether the licensee can grant sublicenses; and

    • use restrictions and any additional requirements or limitations.

  • Delivery and acceptance. The software license agreement should address how the software will be delivered to the licensee, along with whether the licensee will be permitted to verify that the software performs properly according to agreed functional requirements and performance specifications before accepting the software.

  • Proprietary rights. A software license agreement should include the licensor's reservation of all its rights not specifically granted to the licensee and the licensee's acknowledgment of the licensor's ownership of the licensed software.

  • Payment terms. Software license agreements often address how the licensor gets paid in more detail than what the licensor gets paid. As such, a software license agreement may contain provisions concerning one or more of the following:

    • pricing and fee changes;

    • invoicing and payments;

    • a most favored pricing or licensee obligation;

    • licensor audit rights; and

    • taxes.

  • Risk allocation. The parties to a software license agreement typically allocate risk in the agreement through representations and warranties, indemnification, limitations of liability, and insurance provisions.

  • Support services. Software licensees typically expect the licensor to provide software support services which are most commonly described in a separate software support agreement. However, support provisions are sometimes included in the software license agreement on an attached exhibit or available online on the licensor's website.

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