If you are a software vendor wanting to license your software, this article is for you. First, we will discuss the basics of software licence agreements and some of the most essential terms vendors should consider.
A software licence agreement is a contract between the vendor (software owner or reseller) and the licensee that sets out the software’s terms of use. The various licence types are described below.
Commercial Software Licence Types
Proprietary or Closed-Source Licence
A proprietary software licence is a commercial licence that restricts users’ use, modification, distribution, and viewing of the software’s source code. Such licences usually require users to agree to an End-User License Agreement (EULA) that outlines the terms and conditions of use.
Examples of software using proprietary licensing
- Microsoft Windows
- Adobe Photoshop
Public Domain Licence
Software in the public domain has no copyright protection, allowing anyone to use, modify, and distribute it without any restrictions.
Examples of software using Public Domain licensing
- FreeDOS – an open-source operating system compatible with MS-DOS
- SQLite – A serverless and relational database management system.
MIT License:
The MIT License is a permissive open-source license that allows the public to use, modify, and distribute software. However, the original copyright notice must remain in place.
Examples of software using MIT licensing
- Node.js – a JavaScript runtime built on Chrome’s V8 JavaScript engine
- jQuery – a fast, small, and feature-rich JavaScript library.
GNU General Public License (GPL)
Description: GPL is a copyleft licence that ensures any derivative works will also be subject to the GPL.
Examples of software using GPL licensing:
- Linux Kernel: The core component of the Linux operating system
- GNU Compiler Collection (GCC): A suite of compilers for various programming languages
Apache Licence
The Apache License is a permissive open-source license that allows users to use, modify, and distribute software provided they include the original copyright notice and disclaimers.
Examples of software using Apache licensing
- Apache HTTP Server – the world’s most widely used web server software.
- Hadoop – a framework for distributed storage and processing of large datasets.
BSD Licence
The BSD License is a permissive open-source license that allows you to use, modify, and distribute the software with minimal restrictions. It is known for its simplicity and flexibility.
Examples of software using BSD licensing
FreeBSD – a Unix-like operating system derived from the Berkeley Software Distribution (BSD).
Nginx is a high-performance, open-source web server and reverse proxy server.
Free Software License
Free software licenses, as defined by the Free Software Foundation (FSF), ensure that users have the freedom to run, study, modify, and distribute the software.
Examples of software that uses Free Software licensing:
- GIMP: A free and open-source raster graphics editor
- LibreOffice: A free and open-source office suite
Software Licence Agreement Key Terms
Effective software licence agreements are pivotal for software vendors to protect their rights while minimising the risk. A software licence agreement sets the terms and conditions for licensees to use the software.
Below are some key terms of licence agreements and tips to help software vendors protect their rights and interests.
Warranties, Intermediate & Essential Terms
Before we discuss specific risks, it is essential to outline the types of contractual terms:
- Warranties
- Intermediate Terms
- Material Terms
Warranties: A warranty, if breached, does not give the innocent party a right to terminate an agreement. However, breaching a warranty can provide the innocent party with a right to damages. For example, if a vendor fails to rectify a minor defect within the required time, the customer rejects it and claims damages. It is commonplace for software vendors to disclaim warranties, except for those that apply under the Australian Consumer Law, including that the software will be error-free or be fit for a particular purpose.
Intermediate Terms: Intermediate terms are not as serious as essential terms but are more serious than warranties. While a breach of an intermediate term does not automatically give the innocent party the right to terminate, the innocent party may terminate if the breach is persistent and causes the innocent party damage or loss. For example, suppose a web hosting provider’s services go down more frequently than the uptime limit specified, and this unscheduled downtime continues. If such a warranty is captured in the agreement and breached, the customer can terminate it.
Material Terms: An essential term is a term that goes to the heart of the licence, such as the vendor’s obligation to deliver the software and the licensee’s obligation to pay the licence fees. A breach of a material term will often allow the innocent party to terminate and, subject to the licence terms, claim damages and potentially indirect loss, such as loss of data, loss of business opportunity, or loss of profits.
Intellectual Property Rights
Software vendors will often defend the licensee against any third-party claims against the licensee for their use of the software. Typically, such defence will be conditional upon the following:
- The licensee informing the vendor of the claim
- The licensee allowing the vendor to take control of the defence
- The licensee providing reasonable assistance to the vendor with the claim
- The licensee must not make any admissions or offers to settle the claim
Software vendors must protect their intellectual property concerning the software and the materials under the licence agreement by clearly stating that the licence does not transfer any rights. Additionally, it is usually appropriate to provide that ownership in any of the licensee’s materials is not transferred under the agreement if the licensee provides any such materials.
Dispute Resolution
Establishing mechanisms for resolving disputes with licensees is essential to prevent parties from litigating through the court process earlier than necessary. The best approach is to have an escalating dispute resolution model.
This process requires parties to resolve disputes, starting with good-faith negotiations and escalation of the dispute to upper managers. If this cannot be resolved during negotiations, the parties must then arrange mediation. If the parties are still unable to resolve the dispute at mediation, the parties must proceed with arbitration. If the dispute cannot be resolved, the parties may commence litigation through the courts.
The dispute resolution process will never prevent injunctive relief.
Updates
Licensees will usually push for software improvements and bug fixes—which is only fair. They will also usually require some level of support from the software company. Unfortunately, these aspects of software licence agreements are often overlooked, leading to frustration.
Vendors usually include software updates, patches, and bug fixes in the licence fee, as they must maintain the software’s operability and security. However, software licence agreements must not leave any ambiguity. For example, the licence agreement should specify that the licence does not include add-ons and new version releases.
Indemnities
In software licence agreements, vendors will require the licensee to indemnify them in relation to loss the vendors suffer due to the licensee’s breach of material terms, including where, for example:
- The licensee breaches confidentiality provisions
- The licensee attempts to gain access to the source code or tries to reverse engineer the software
- The licensee introduces harmful code into the system
- The licensee is negligent in its operation of the software
- The licensee uses the software outside of the terms of the licence
Software vendors must ensure the indemnities are reasonably necessary to protect their interests under Australian Consumer Law, where that law applies. Additionally, vendors should consider indemnifying the licensee (in addition to any indemnifying/defending the licensee against third-party claims) to ensure that the parties’ rights are not imbalanced to reduce the risk of breaching unfair contract term provisions under the Australian Consumer Law.
Licensing Fees and Payment Terms
The financial aspects of licence agreements are critical to define accurately. For example, the agreement must set out licensing fees for one-time purchases, subscription-based, or pay-per-use models. Other payment terms, such as taxes, relevant dates, and other fees, should also be included.
Scope of Use and Usage Restrictions
Defining the permitted use is an important aspect to address. For example, software vendors should stipulate the number of users, devices, and locations covered. Usage restrictions, such as prohibitions on reverse engineering, reselling, using for illegal purposes, hacking, or corruption of the source code, must also be prohibited.
The usage restrictions should align with the software’s intended purpose.
Updates and Version Upgrades
Vendors should clarify their obligations regarding software updates and version upgrades. Address whether these updates are included in the license fee or require separate payment. For example, installable software may include minor updates at no charge, but major version releases may come at a cost.
Variations
Unilaterally varying an agreement can be problematic as such variations can be considered an unfair contract term, particularly where the variation affects a party’s rights. For example, fee increases (greater than CPI, for example) that are not specified in the agreement can be problematic. Vendors should avoid unilateral variation terms that materially affect the rights of licensees.