If you are a software development company and want to license your software, then this article is for you. We discuss the basics of software license agreements as well as some of the most important provisions that software companies and developers need to consider.
It is critical to get your license agreement rigth from the outset. Failing to do so can affect your rights to your own software and potentially damage your brand.
Remember: This article covers the basics of the software license agreements and you should seek proper legal advice from a legal practitioner regarding any contract that you intend to enter.
Software License Agreement Basics
A license is a set of legal rights that the person or company that licenses the software (licensee) is provided by the licensor. There are many types of licenses, and combinations of licenses available.
Let’s take a look at a number of common software license types below.
The Different Types of Software Licenses
For uses of software which is installed on a computer such as Windows the typical license is known as an end-user license agreement (EULA). The end-user license agreement does not allow users to sell licenses in the software, merely the rights to use the software. The EULA often restricts the license to one user or computer.
A master license provides the licensee with administrative functionality that can allow the licensee to add end users. For example, a software developer may sell a yearly license to a company to use their customer relationship manager (CRM). The master license may allow the company to add their employees as end-users.
The commercial license is sold to the licensee and the price is usually based on the basis of the number of end-users. A commercial license is often paid for by the licensee – the end-users are not charged directly (resold).
A master license is a type of commercial license that allows the licensee to sell end-user licenses to third-parties. This is unlike the commercial license where the licensee will buy a software license that comes with a number of end-users who can access the software.
This license allows the distributor to sell the software in the marketplace. This type of software license is less prevelent these days, given that most software is software as a service (SaaS) and therefore the requirement to distribute physical software is not nearly as popular as it once was.
White Label License
A white label licenses allows the licensee to rebrand the software with their logo and corporate colours, with little or no reference to the software developer. There are many software developers who base their entire businesses on this model. This type of software license can be beneficial to the software company because they usually require the licensee to perform training and support under the brand.
GNU Lesser General Public License
A GNU Lesser General Public License is a type of software license that enables users to utilise software license free of charge. Users can even share and modify GNU Lesser General Public License licenses. However, under GNU, if you modify the software code that you use within your own software, your software must also be a GNU Lesser General Public License.
Public Domain License
Public Domain software licenses allows to use the software, use it and modify it however they wish, even if the software
What is a Software License Agreement?
A software license agreement is a contract between the software development company and the licensee that sets out the rights and oblligations of the parties under the license.
Types of License Agreements?
There are a myriad of possibilities when it comes to licenses. Therefore, it is important to understand what the software development company wants to achieve – or what they are willing to negotiate.
Why You Need a Software License Agreement
A software license agreement is required when providing access to your software to a third-party, as it sets out the terms and conditions upon which the licensee (and potentially the end users) can use or sell the software, as the case may be.
Ownership vs License
Ownership, in terms of software – or source code, refers to the intellectual property rights persuant to the Copyright Act 1968 (Cth) (Copyright Act). Specifically, section 47(AB) of the Copyright Act provides that a computer program is a literary work.
Literary works, like other forms of copyrighted material such as dramatic and musical works, is protected by the Copyright Act upon the works’ creation – unlike trade marks, designs and patents, copyrighted material do not require any form of registration.
Many people ask whether it is possible for the licensee to ‘own’ the software inadvertently, if the software is licensed. Generally speaking, ownership of source code will not transfer to the licensee without a written agreement that transfers those rights.
Section 196 (3) of the Copyright Act states:
An assignment of copyright (whether total or partial) does not have effect unless it is in writing signed by or on behalf of the assignor.
Therefore, it is important to ensure that the software license agreement does not have a clause that transfers ownership in any part of the software. I haven’t ever heard of this happening, primarily because most license agreements are drafted by the software developers’ lawyers rather then the licensee’s lawyers – however it is certaintly worth checking for.
Where ownership will provide the transferee complete ownership of the software for a higher fee, licensing allows you to retain ownership of the software and potentially license it to numerous software for a lesser fee. Further licensing allows you to retain control over your software.
Important Terms and Conditions
Breach of Contract and Termination Rights
Software developers must set out the terms and conditions and must also set out the consequences if those terms are breached. For example, if a the licensee doesn’t sell a minimum amount of end-user licenses, the software license agreement may terminate the agreement and regain control of the software.
Related article: Breach of software development contract.
As with all types of contracts, it is best that software license agreements have alternative dispute resolution (ADR) clauses within. It is a good idea to do what you can to keep disputes out of Court to save time and costs. Litigation is a massive distraction that yout business just doesn’t need.
Ensure that you have the provisions that
Being paid license fees may appear to be quite obvious. However it is important to consider how you are being paid as there are various pricing models to consider. Software companies often charge a monthly license fee. Others also require a set-up fee as well – especially if it is a white label license or if the software is being installed on the licensee’s hardware.
If the licensee has the rights to sublicense the software, there may also be royalties to be paid per sublicense or end user.
Rights to the Software
Think about what rights you want the licensee to have. What is the extent that they can use the software. What does the license allow the licensee to do? Do they have the right to access and use the software? perhaps they have the rights to resell the software.
Whatever their rights, they must be set out specifically in the license agreement. I usually like to establish the intentions of the parties at the start of the contract clearly in the recitals.
You should also contemplate whether the license rights are able to be transferred to a third-party. I usually advise against this, unless there is an agreement in writing from the licensor of the software.
Updates & Support
Licensees will usally push to have improvements and bug fixes in the software – which is only fair. They will usually require a level of support to be provided by the software company. These aspects of software license agreements are often overlooked and can lead to frustration.
Developers are usually happy to provide updates to their software, as it helps maintain security and add some fixes or improvements that the licensee requests. However, it is important that your software licensee agreement doesn’t leave any ambiguity for the licensee to interpret “software updates” to mean “complete re-egineering of the platforn”.
Also, you must accurately describe the support terms. For example, is support provided through a help desk? Is there an addiitonal cost? Is there a level of training provided? Will you offer phone support? what are the hours? I am sure you get the idea.
I recommend having non-exclusivity clause that does not prevent you from selling software licenses to other parties, unless the licensee is paying a significant amount of money for that right. If the licensee wants exclusivity to the software it means that you are unable to license to anyone else.
However, it may be more acceptable for an exclusivity clause, that applies for the licensee to have excluciivity in a particular territory.
With software, especially with software as a service (SaaS) you will need to ensure there is strong indemnities within the license agreement. The aim of having the right indemnity is to limit the software company’s in the event of software outtages and data loss. You should also consider the nature of your industry and address risk to the end-user of software. For example, I assisted a security software company with their software license. I had to ensure that the licensee took responsibilties for the safety of security personnel and the employee tracking feature, as only a feature for convenience and not a safety device that the company or its employees would rely on to the extent of a guarantee of safety.
As you will see, I am setting the below section in question form as they are the most important questions that software companies must contemplate before negotiating or drafting a software license agreement.
Answering these questions will help you prepare before consulting with an experienced software lawyer :
What Software Are You Licensing?
It is not uncommon for the software to have numerous modules. You only need to turn to Oracle for the perfect example of a company that has a very wide variety of software.
You need to ensure that the software is properly described in the license agreement along with the modules.
What Level of Access Does the License Provide?
After you describe the software that is subject to the software license agreement, you then should outline the user level access that you intend to provide as part of the license.
How Many End-users Does the License Provide?
The software development companies who offer commercial licenses should consider how many end-user license is subject to the licenses.
Support and Maintenance
Who will be providing the support? If you are selling a commercial license, will you provide support to the licensee, as well as the end-users?
What are the terms of performing maintenance? Is maintenance required to be performed between certain hours? Is notice required to be given?
Will you provide phone support, or will support be provided via a help desk?
Payment and Term of the License Agreement
What date does the agreement start and what date will it end? How can the parties terminate the agreement, and for what reason? These questions also relate to the timing of payments – for example, yearly or monthly license fees.
Frequently Asked Questions
Please find the FAQ’s below:
What Software License Agreements Cover?
The license should set out the terms upon which the licensee can use the software. It should also address the software being licensed, the warranties of the software, the type of software being licensed, the term as well as dispute resolution and termination rights – among many other contractual provisions.
How to Create a Software License Agreement?
A sofrware license agreement must be carefully drafted by a lawyer who understands the complexities of software development and licensing arrangements.
What Is Software Licensing?
Software licensing is a business model, where a software company sells a license to use, sell or sublicense to third-parties.
Why You Need a Software License Agreement?
A software license agreement creates a legal relationship between the software development company and the licensee and potentially its end users. Without an agreement that governs the license, the parties will be unsure of each other’s rights and a dispute could be imminent.
Why Software Licensing Is Important?
Software licensing is important because it sets out the rights and obligations of the software licensee and the licensor.
This guide is written by Ben Waldeck, technology and software lawyer, who operates in Brisbane and Gold Coast, Australia.