If you are a software vendor wanting to license your software, this article is for you. First, we discuss the basics of software licence agreements and some of the most important aspects to consider.
It is critical to get your software licence agreement right from the beginning. A software licence agreement is a contract between the owner of the software owners and licence purchasers (licensees) that sets out the rights and obligations of the parties. Various licence types are described below.
Rights in Software
Software can be owned, assigned and licenced as it is personal property and other intellectual property. Section 47(AB) of the Copyright Act 1968 (Cth) specifies that a computer program is a literary work. Copyright material, such as software, does not require registration, unlike trade marks, designs and patents.
Commercial Software Licence Types:
Commercial licences are used for software sold for profit, typically with various usage restrictions and potential payment requirements.
Examples of software using commercial licensing:
- Custom-developed software.
- Software that may be modified, for example, to allow for plugins, modules, and other customisations.
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: A widely used operating system with a proprietary license.
- Adobe Photoshop: A commercial image editing software.
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 popular, self-contained, serverless, and public domain relational database management system.
The MIT License is a permissive open-source license allowing the public to use, modify, and distribute the software. The original copyright notice must remain in place.
Examples of software using MIT licensing:
GNU General Public License (GPL):
Description: GPL is a copyleft license that ensures any derivative works are also licensed under 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.
The Apache License is a permissive open-source license that allows you to use, modify, and distribute the software with the condition that you 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.
The BSD License is a permissive open-source license that allows you to use, modify, and distribute the software with minimal restrictions, 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: 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, including SaaS companies and software developers, to protect their rights and interests while minimising the risk of potential disputes. A software licence agreement sets the terms and conditions upon which the licensee (and potentially the end users) can use, sublicense, or sell the software.
By meticulously addressing key terms in software license agreements, software vendors can provide transparency to their clients, which builds trust and minimises the risk of misunderstandings and disputes.
Below are some key terms of licence agreements and tips to help software vendors protect their rights and interests.
Warranties, Intermediate & Essential Terms
Software licence agreements must define the following terms:
- Intermediate terms, and
- Essential terms.
The contract must also specify what will happen if a party breaches one of the abovementioned terms. For example, a warranty may require the software developer to rectify bugs within 30 days. If a warranty is breached and is not rectified, the non-breaching party will likely be entitled to damages.
An essential licence agreement term may require the customer to pay the milestone payments according to the payment schedule. If there is a breach of contract of an essential term, the innocent party may terminate and seek damages.
Finally, intermediate terms may require extra attention. As you may have guessed, these terms are not as severe as essential terms but are more serious than warranties. Intermediate terms are often breached due to a continued issue.
For example, suppose a web hosting provider’s services go down more frequently than the uptime warranty specified in the contract. If such a warranty is captured in the agreement and breached, it will allow the customer to terminate it.
It is critical to define in the contract the effects of termination. If we take the hosting example above, it would be beneficial to have transition-out terms in the contract, requiring the host to assist the customer in migrating to their competitor’s hosting services, for example. Other such terms may be to return all confidential information, intellectual property and other such property and materials.
Terminating a contract is serious; you should never do it without qualified legal advice.
Licence Rights and Fees
Naturally, software licence fees should be included in the licence agreement. Software vendors must set out the rights of the licensee. For example, exclusive rights, sublicensing rights, and the rights of end users will all likely be relevant to the licence fee model.
Updates & Support
Licensees will usually push to have improvements and bug fixes in the software – which is only fair. In addition, they will usually require a level of support from the software company. Unfortunately, these aspects of software licence 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, your software licence agreement must not leave any ambiguity for the licensee to interpret “software updates” to mean “complete re-engineering of the platform”.
Also, could you accurately describe the support terms? For example, do you know if support is provided through a help desk? Is there an additional cost? Is there a level of training provided? Would you be able to offer phone support? What are the hours? I am sure you get the idea.
With software, especially software as a service (SaaS), developers should have contractual indemnities within the licence agreement to protect them from the licensee and end-users loss and damages. The aim of having the proper indemnity is to limit the software company in the event of software outages and data loss.
Software vendors must ensure the indemnities are reasonable if they are subject to 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 such as one-time purchase, 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, or hacking or corruption of the source code, must be prohibited.
The usage restrictions should align with the software’s intended purpose.
Support and Maintenance:
Set out the support and maintenance levels. Specify response times, availability, and the scope of technical assistance. Outline your commitment to providing software updates, bug fixes, and patches.
Updates and Version Upgrades:
Clarify your clients’ rights to receive 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 to the Agreement
Unilaterally varying an agreement can be problematic unless it is reasonable. Reasonableness will often require a significant notice period of the fee increase, and the increase itself should be reasonable.
That said, SaaS vendors must have a provision in their licence agreement to change pricing that complies with the Unfair Contracts Provision Regime under the Australian Consumer Law.
Termination and Exit Strategies:
Define the conditions under which either party can terminate the software licence agreement. Be transparent about notice periods and the handling of data upon termination.
I also recommend software vendors establish a process for clients to transition smoothly to alternative solutions. Transition-out provisions will limit the risk of unilateral fee increases breaching the Unfair Contract Terms regime because customers can easily avoid the fee increase by transferring to a competitor.
Intellectual Property Rights:
Software vendors must protect their intellectual property in the licence agreement by clearly stating that ownership rights are not transferred over the software’s source code and other intellectual property.
Further, set out clients’ rights in relation to modifications or customisation that they may perform. Vendors can also use confidentiality clauses to safeguard any confidential information.
Establishing mechanisms for resolving disputes with licensees is essential to prevent parties from litigation through the court process earlier than necessary. The best approach is to have an escalating dispute resolution model that follows various phases.
This process requires parties to resolve disputes, starting with good-faith negotiations. If unable to be resolved at negotiations, the parties then arrange mediation. If the parties are still unable to resolve the dispute, the parties go through arbitration. If the dispute is still unable to be resolved, then the parties may commence litigation through the courts.
Related article: Alternative Dispute Resolution
Frequently Asked Questions
Why You Need a Software Licence Agreement?
A software licence agreement creates a legal relationship between the software development company and the licensee and potentially its end users. The licence agreement also sets out the rights and obligations of the parties regarding intellectual property, termination, permitted use, payment, term, licensing, and dispute resolution.
If you need help with your software licence agreements, please get in touch with technology lawyer, Ben Waldeck to discuss.