February 19, 2013

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Article

Software Licenses

Considerations When Making a Deal

Ric Jackson

February 19, 2013

Software is often your company’s most valuable asset. Perhaps it is your company’s only asset! In an effort to make a return on the investment made in such software, your company may want to license it out. On the other hand, your company may wish to license software developed by another party, to save the cost and hassle associated with internal development.

Software licenses present great benefits. However, burdensome disputes can result from failure to address common issues that may arise later on. Decision makers should consider the five issues below when entering into a software licensing deal. Careful license drafting may prevent later disputes.

Access and Use

The parties should make clear the extent to which the software can be accessed by the party being granted the license, the licensee. Parties may decide that access will be limited to a certain number of users, or a certain number of users at any given point in time. Access may be limited to a specified division, department or facility of the licensee. Parties may decide that access should only be on networks running on specific operating systems or hardware platforms.

Beyond defining who can access the licensed software, parties ought to define the purpose for which the licensed software is accessed. The party granting the license, the licensor, that neglects to include the purposes for which the software may be used is often surprised, for example, to learn that the software is being used to process information or perform tasks on behalf of the licensee’s customers, rather than for the licensee’s “internal use only.”

Third Parties

The parties to a license agreement do well to clearly define the extent of third-party rights at play. The license should clearly state whether the licensee has the right to grant sublicenses to others and if so, any applicable conditions. For the avoidance of doubt, parties should specify whether the licensee’s affiliated companies or independent contractors of the licensee also receive the benefit of the license. 

A party to a license may be acquired during the term of the license. Does the license run to the benefit or burden of the acquiring company if the license agreement is silent on the issue? Even if there is a clear, legal answer to such a contingency—and oftentimes there is not—parties are wise to eliminate any doubt up front. 

 

Improvements

Software development is often an ongoing process. Disputes can crop up when the parties to a license agreement fail to anticipate what might become of the improvements made to software, either in the form of modifications or enhancements. Questions especially arise where the licensee is the party that improves the software. Does the licensee own the improvement to software that is owned by the licensor? Does the licensor own something that it didn’t develop?

Parties should expressly address improvements by specifying in their license agreements whether the licensee may improve the software, who may use any such improvement and who retains ownership to any associated intellectual property. A common solution is to specify that the licensor retains ownership of improvements made by the licensee, but that the licensee has a license to any such improvements, so that both parties can benefit.

Indemnification

Parties to a license agreement may find themselves in a dispute with a third party arising from the use of licensed software or due to a breach of the other party to the license. Who is financially responsible in the event that such a third-party dispute arises, and for what are they responsible? Parties can avoid confusion by indemnifying—agreeing to compensate for future losses associated with such a third-party dispute—one another in the license agreement itself. The parties ought to specify the extent of the indemnification, such as whether only damages resulting from court judgments apply, or whether other items such as attorneys’ fees and court costs are also included.

Commonly, the licensor will in-demnify the licensee against claims made by third parties arising from the licensed use of the software, but the licensee will indemnify the licensor against third-party claims that are attributable to the licensee’s own negligence.

Termination

Parties may not want to think about termination of a license in the process of forming it, but it is important that they do so to avoid business disruptions down the road. If the license can be terminated by one of the parties, it should be specified whether justification is required and whether notice to the offending party, and an opportunity to cure the offending conduct, is necessary before such termination.

Seeking to minimize potential business interruptions, parties may agree to an “irrevocable” license, where use of the licensed software continues while disagreements relating to the various terms of the license agreement are sorted out, such as whether money is owed to one party or whether the licensee’s use exceeds the scope of the license.

With careful consideration of all relevant issues, including those discussed above, decision makers can minimize the potential for disputes and better ensure that their interests are protected.


Ric Jackson is an attorney in Holland & Hart’s Salt Lake City office, where he guides clients in transactions involving intellectual property.

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