Nearshore Americas

Why One-Size-Fits-All Is Not a Good Fit for Software Licensing Agreements

I am often asked to draft or review software license agreements. Some are basic and some are more complex. What is surprising to me is the willingness in the market to turn to a legal expert named “Google” to search for sample contracts and sample license language. Then the company includes what they find in the deal without thinking very hard about whether the language fits the deal in the first place.
The peril of such behavior is not only that the license chosen may be unfit for the deal but also that the company granting the license could inadvertently be granting certain rights it does not intend to grant — and could even be transferring intellectual property rights — without even knowing it.
So, let’s tackle the issue from scratch. What is a software license? It is an agreement where the licensor gives to the licensee the right to use intellectual property rights that protect the software. Software licenses are copyright licenses.
What is a good example of a copyright in software? Code. Copyrights are protected by federal law and give the holder of the copyright exclusive rights to reproduce, modify, distribute, publicly perform, and publicly display. Anyone who intends to use someone else’s software needs permission to engage in any of those activities.
In thinking about your software deal, what types of rights do you need to grant to your customer? The answer ultimately lies in the following question: What does the licensee need? In other words, the type of license really depends on what your customer will be doing with the software. Your customer will be able to do what you allow it to do with the software.
Software licenses come in many shapes and forms, and while there are standard clauses that will work in a variety of deals, the structure and goal of each licensing deal needs to be analyzed with the goal of giving the customer what it needs while protecting ownership in the intellectual property.
For instance, in a standard end-user software license, the licensee needs reproduction and use rights, but does not need distribution rights. Compare that with a “reseller” scenario, in which the customer will be distributing the software to third parties. In the reseller scenario, the licensee usually needs use, reproduction and distribution rights. Nonetheless, I often see license agreements with the wrong terms and the wrong license rights.
One of the most common licensing misconceptions involves software as a service (SaaS) deals. A SaaS deal does not call for a copyright license at all because in that type of deal the customer is not “downloading” anything on their computer. Rather, in a SaaS deal the customer accesses the software via the internet. In other words, the customer is not copying any software, it is simply accessing it over the internet. It is a service. In a SaaS deal, therefore, the customer needs permission to access the website, not a grant of copyright rights.
On the other side of the spectrum is the software development deal. A software development deal involves a completely different scenario because in a software development deal the copyright is created as the code is written. In a software development deal the question is: Who will own rights to the software? The vendor (the one sitting down and typing code and who is the original author) or the master (the one paying the vendor to write the code)? The answer is that the parties can negotiate that in the contract, and proper terminology must be used to properly effectuate the desired intent of the parties.
The above are just a few examples of different ways in which software can be negotiated and in which licenses can shape a software deal. But there are additional terms that are equally important. Once the copyright rights have been granted (or the deal has been shaped), the contract must also address certain license “scope” terms, such as exclusivity, territory, duration, revocability, payment, transferability, and use restrictions, such as seats, installations, or users. Each one of those terms must be carefully crafted to ensure that the parties’ expectations are clearly defined in the contract. Failure to carefully write those terms can result in a deal that does not reflect the verbal agreements.
Unfortunately, there are probably thousands of contracts out there that grant the wrong type of license and that use incorrect terminology and structure in the deal. Often times, the only way in which parties find out about the weaknesses in the contracts is in litigation, when it is too late to fix the problem. The best advice is to stay away from copying or recycling agreements that you find on the internet.

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Gabriela Smith

Gabriela Smith is a business lawyer with over 10 years of experience in business law. She's Managing Attorney at The Smith Law Group and Counsel at Klemchuk.

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