Often suppliers approach us to understand how they can commercialise a piece of software that they have developed. On the other side of the fence, customers often ask us to negotiate and explain their position under a software licence agreement they have been given.
In this article, we will touch on key elements of software licence agreements to help you understand issues that typically arise.
What is software?
Software can be generally defined as a computer program comprising of a series of instructions, which, in combination with the underlying hardware and inputs from an end-user, allow or cause a computer to perform a specific operation.
What is a software licence agreement?
A software licence is an agreement that grants the user (customer) the right to use a specific piece of software, subject to the terms of the licence. A licence differs from an assignment, which is a transfer of ownership of the underlying intellectual property rights in the software (i.e., the copyright in the source code).
Legal points to consider with a software licence agreement
When negotiating a software licence agreement, suppliers and customers should consider a variety of issues. These include:
- Charges – the frequency and structure of fees payable, to cover such things as support, maintenance, training and other ancillary services.
- Delivery – software is typically supplied to customers in two primary ways:
- Deployed software – also known as an ‘on premise’ software, this is installed, configured and hosted on the customer’s own computers, servers or its data centre; or
- As ‘Software as a service’ (SaaS) – is provided on a subscription-only basis and is hosted centrally on the supplier’s chosen infrastructure. A SaaS can be structured accordingly, whereby it can expand or shrink depending on the customers’ needs.
- Duration – the duration of the licence can usually be divided into one of three categories, these being:
- Fixed-term;
- Renewable; and
- Perpetual.
- Exclusivity – the exclusive or non-exclusive nature of the licence should be subject to special attention – particularly if the software has been commissioned by the customer. Should the software be provided on a non-exclusive basis, the supplier can continue to use the software itself as well as license it to any number of other third parties. An exclusive licence prohibits any person or entity other than the named customer from using or exploiting the software. Most importantly, this also prevents the supplier itself from using the software.
- Intellectual Property rights – by the very nature of a software licence, the intellectual property rights in the software will be owned by the licensor (typically the supplier). If the intention is for the customer to own the intellectual property rights in the software, then a software licence is not the document to use – a copyright assignment will be needed.
- Liability – as with most agreements, the parties will have conflicting views on how liability should be treated – the supplier will want liability capped at a low level, and the customer will want the supplier’s liability to be uncapped. The veracity of the approach will depend on the amount paid for the licence, the business-critical nature of the software, and whether it is bespoke.
- Location – the usage rights under a software licence are often limited to a specific geographical location. Typically, a customer will ideally prefer a software licence that grants usage on a worldwide basis, whereas a supplier will want to restrict the use of software to a specific country and have the benefit of charging for usage in additional countries.
- Sub-licencing – the right to grant sub-licenses can be a necessity for many businesses. A customer may typically want to grant sub-licenses to group companies or to consultants who work within the business. However, a supplier will usually want to restrict the customer’s ability to grant sub-licenses because of the risk of losing potential revenue for licences it could otherwise grant. Where the right to sub-license is granted, a supplier may wish to impose end-user terms on the sub-licensee to allow a direct cause of action in the event of a breach.
- Support – it is generally accepted that software is not totally error-free, therefore it is common that support and maintenance of software are provided – sometimes free of charge, and sometimes as a paid-for service. Support by the supplier would typically cover points such as updates to the software, technical support and error fixing. A customer may also insist on binding services levels with set remediation periods. Support is perhaps less important for an off the shelf established piece of software but can be of critical importance for business-critical software. Customers should pay special attention to the issue of continued support in the event the supplier becomes insolvent – and escrow may be a convenient solution.
- Transferability – the licence should state clearly who is granted the benefit of the licence and if the customer has the right to transfer (by way of assignment, novation or otherwise) to a third party, and if the supplier’s consent is required for a transfer. A right to transfer can be very important for bespoke or business-critical software –particularly on the sale of the business.
How can Nelsons help?
For further advice on the subjects discussed in this article, please contact Emma Toes (née Ward) in our expert Commerce & Technology team in Derby, Leicester or Nottingham on 0800 024 1976 or via our online enquiry form.