Software License Agreements

Software license agreements raise important considerations for both software licensors and licensees. For software licensors, a software licensing arrangement can generate significant revenue and the licensor's ownership and control of its intellectual property (IP) rights in the software are typically paramount. For software licensees where the licensed software's use can be critical to the licensee's business operations, the scope of the license and any restrictions on use are key. Given these types of concerns, it is important for each party to understand the key issues and tailor the software license agreement to suit the particular transaction. This article addresses issues arising in on-premises software licensing when drafting or negotiating a software license agreement for off-the-shelf software (as opposed to customized software).

This article is based on the Software License Agreements Practice Note, one of more than 70,000 resources available through Practical Law. Get a free trial of Practical Law today.

License purpose

• Whether the license's primary purpose is revenue generation and the licensor's business model for revenue generation — such as direct licensing to end users or using software distributors that either resell the software on a stand-alone basis or bundle the licensor's software with other software or equipment.
• Protection of the licensor's proprietary software as IP.
• Business factors.
• Strategic goals.
• Whether any elements of the software are proprietary to other parties or contain open-source software components. If so, the licensor should evaluate the impact of any necessary flow-down provisions in the agreement and how they impact the licensor's contracting strategy.

The licensee should consider:

• Its intended uses of the software.
• The software's specifications and whether its functionality meets the intended users' needs.
• Whether use of the software is critical for the licensee's business operations.
• The software's interoperability with the licensee's IT infrastructure and environment and whether any development or customization is required for interoperability.

Types of software license agreements

Software license agreements vary widely and are based on many different factors, including the type of software being licensed. A software license agreement can be:

• Non-negotiated, in a shrinkwrap or clickwrap form.
• Negotiated.
• Referred to as an end user license agreement (EULA).

Licensors typically license mass-marketed, off-the-shelf software under non-negotiated, standard shrinkwrap or clickwrap agreements. Shrinkwrap agreements are formed when the user affirms consent to a printed agreement by opening the clear, plastic, shrink-to-fit wrapper that seals the product.

Under a clickwrap agreement, the user is presented with the agreement terms onscreen and required to take a specified onscreen action (for example, clicking on an “accept” button) to affirm consent to be bound by those terms.

Negotiated software license agreements vary in many respects. In particular, variances in the scope of the license grant and the type of use are most typical and can impact the agreement's financial terms. In contrast with consumers of off-the-shelf software, businesses that license enterprise or other multi-user software may insist on negotiating all or certain terms of their software license agreements by using the licensee's own form or modifying the licensor's standard form in a negotiated agreement.

A EULA is an agreement between the software licensor and an end user, which can be an organization or an individual. Typically, EULAs are presented in clickwrap form. Software licensors also often use EULAs in the software distribution context.

Drafting and negotiation

Parties should consider several key issues when negotiating and drafting software license agreements.

• The scope of the license grant. The license grant is the central provision in a software license agreement. It should precisely define the scope of rights granted to the licensee, including:
  • licensed software and related documentation;
  • licensed party or parties;
  • licensed rights and permitted uses;
  • the extent of exclusivity;
  • whether the licensee can grant sublicenses; and
  • use restrictions and any additional requirements or limitations.
  • pricing and fee changes;
  • invoicing and payments;
  • a most favored pricing or licensee obligation;
  • licensor audit rights; and
  • taxes.

  For a more complete treatment of this issue, please read the Practical Law resource Software License Agreements, one of more than 70,000 resources available through Practical Law. Get a free trial of Practical Law today.