What is Software?
Most lawyers / solicitors believe that they have a good understanding of what it meant by the term “software”. Most see software simply as something that makes a computer perform certain tasks and that is fundamentally true although an overly simplistic view.
Software can be broken in three basic layers as set below.
- The operating system – this runs the basic function of a computer and is really the foundation on which the other layers of software are reliant on to run. Without an operating system installed on a computer, the computer is practically useless.
- Utility Software – this software adds function to the operating system and most users will not be aware of its presence and is generally the preserve of the IT professionals. Such software includes anti-virus software or network management software.
- Application Software – this is what the end user is primarily concerned with and concerns the visible software application that it uses on a day to day basis. For example, word processing, email, web browsers.
How software is sold is largely dependent on where it falls within the above categorisation. For example, operating systems are traditionally bundled with the hardware as well as utility software. Application software is generally sold as packages based on standard terms. Microsoft products being a common example of this.
What are the main issues in a Software Licensing Agreement?
Software Licensing v.s Software as a Service
When considering software licensing, it would be remiss not to mention the Software as a Service delivery model. For an overview of that model, you can read a related article here: Software-as-a Service: An Overview.
The majority of software licenses are purchased on the supplier’s standard terms and are normally accepted at the point of installation in the form of a “click-through” agreement. This means that most terms are provided on a ‘take it or leave it basis’, but it’s still of utmost importance for end-user organisations to understand exactly what they are buying. Not all “standard” terms are in fact “standard”.
The Licence Grant
At this juncture, it’s worth drawing a key distinction between an “assignment” and a “licence” of software/copyright and you can read more about those concepts in our related article: What is the difference between a Copyright Assignment and a Copyright Licence?
A supplier will typically grant a non-exclusive license to the end-user to use the software. Given the drastically different legal outcomes between an assignment of rights and a license of rights, software vendors will be at pains within their standard agreements to specify what they are granting is a licence and not an assignment of their rights. In fact, it’s common for a software vendor to specify that the licensee cannot sub-license or assign its rights under the contract also.
Software vendors typically introduce a variety of restrictions around the use of the software licence. For example, the software vendor may restrict the deployment of the software to a specific subsidiary within a company group or to a specific geographical location. The software licence will also be restricted by the “unit of measure” or licensing metric. Generally, these can be found in additional terms (sometimes referred to as ‘Product Guides’) that are incorporated into the main agreement by reference to a hyperlink. Some common examples of a “UOM” include – “Per Server”, “Per Seat”, “Per Enabled User”, “Per Managed User”, “Per Site”, “Per CPU”. Each term will be linked to a unique definition and will essentially set the legal parameters around what constitutes a scenario that requires the purchase of a license. This places great emphasis on the customer/end-user to understand how the software is licensed and how it should be installed within its IT estate. Failure to do so can result in the end-user falling foul of the licensing terms, breaching the contract, and potentially entitling the software vendor to seek damages.
Licensing Definitions: Use / Access / Ability to use
A frequent issue that arises in the context of software licensing is the distinction between “use” and “the ability to use” or “access”. It arguable that this issue is driven by vague and ambiguous licensing terms. For example, where software is installed on a server and a large user group is given access to such software but never actually “use” the software, does this mean that each of those users requires a software license? This will largely depend on the terms of the license in questions. There have been many high-profile cases that have wrestled with these issues, for example, SAP UK Ltd v Diageo Great Britain Ltd  EWHC 189 (TCC). The message from such cases is very clear: ambiguous and vague licensing terms make things very difficult for all concerned and ultimately lead to protracted and contentious disputes. There is also an argument to be made that customers should seek out software vendors that make remaining compliant easy with built-in tools within the software to track their deployments. Not all software products contain such features and some software is notoriously difficult to control for that reason.
Right to Use
If the customer wishes to outsource its IT function and use of the licensed product is required by the IT outsourcer in the performance of its function, it is important that such third-party rights are included within the licensing terms. Some software vendors will seek additional license fees to allow for such arrangements.
Its common for software vendors to include audit rights within their standard terms and conditions. Some being more aggressive than others allowing for formal onsite audits conducted by third parties (usually one the of Big 4) and specifying that “additional” charges will apply where over-deployments are identified. Such additional charges can include – back maintenance charges, interest payments and in some of the most aggressive audit clauses – penalty charges, although the enforceability of such charges from an Irish law perspective is dubious – see our related article: Penalty Clauses: Are they enforceable?
End User Rights derived from law
The Directive 91/250/EEC on the legal protection of computer programs confers on end-users /licensees’ certain rights as set out below.
- The right to decompile a program if necessary, to operate a program with another program. This right cannot be excluded within the contractual provisions. However, software vendors commonly include within the licensing terms that they will supply the necessary information to allow its software to operate with another program and therefore decompiling its software is not necessary and contractually restricted for this reason.
- The right to make a back-up copy of a program if necessary, for lawful use. Note: the use of this right should be exercised with caution and limited to situations that are necessary as opposed to being prudent. For example, there’s perhaps no need to make a back-up copy of an off-the shelf program that is readily available. Frequent issues occur where an end-user installs a copy of the software on two machines – office computer and home computer. Some vendors will tolerate this concept, whereas others will require two licenses and will not entertain the notion that the second copy is a back-up copy.
- The right to copy or adapt the program if necessary, for its lawful use. This gives the licensee the right to fix bugs and errors. However, this right is frequently excluded where the software vendor is seeking to sell support and maintenance services also.
- The right to observe, study or test the functioning of a computer program in order to determine the ideas and principles that underlie it.
For package software, the description of the software is what the customer is basing its decision to buy the software on and it’s what the software vendor will base its warranties on.
For bespoke software, a detailed specification should be provided by the software vendor and the warranties given should be based on that.
The term of the licensing is an important concept and will have a direct relationship to the fee paid. Traditionally there are two methods to consider. A ‘term license’ for a fixed duration or a perpetual license that will in theory give the customer perpetual rights to use a particular version of the software unless either party terminates the license.
Where software is expensive and bespoke its normal to include some form of acceptance testing within the contractual terms. This allows the customer to “test” the software and require the software vendor to rectify any issues that have been identified by the customer in the acceptance testing period. In some cases, the customer may retain a proportion of the overall fee, pending its acceptance of the software.
The software vendor will normally give some form a warranty that the software will conform in all material respects to the description of the software for a period of time and will also seek to exclude many statutory warranties.
Limitation of Liabilities
The limitation of liability provisions is often the most hotly debated aspect in software licensing agreements. What can and cannot be excluded in terms of liabilities will largely depend on whether the end-user is a consumer or a business. If the end-user is a business certain issues can be excluded where they are fair and reasonable whereas liability for death or personal injury caused by negligence cannot be excluded.
It’s typical that the software vendor will indemnify the end-user for any third-party claims that the software infringes such third parties’ rights. For example, an ex-employee used proprietary information belonging to the third party in the development of the software. Most reputable software vendors provided such indemnities.
Source Code and Escrow
Having access to the source code allows a customer to recreate the software in circumstances where such is required. Normally the source code relating bespoke software is held by an ‘Escrow Agent’ as part of an Escrow Agreement. The Escrow Agent will be an independent party specialising in this service. The Escrow Agreement will specify certain “trigger events” where it will be contractually required to the Escrow Agent to release access to the source code to the customer. Normally these trigger events relate to a situation where the software vendor becomes insolvent or has begun the process of becoming insolvent or is in material breach of the software licensing agreement. It’s also common for the Escrow Agreement to specify that the source code held by the escrow agent should be updated regularly so that the latest version of the source code is held.
Where there has been bespoke software development, allowing both the software vendor and the customer access to each other’s business know-how it’s common to include some form of mutual confidentiality provisions.
Generally speaking, software license agreements can be terminated for material breach or where the other party becomes insolvent. When considering bespoke software more detailed termination provisions should be considered.
How can we help?
- If you would like to learn more about software licensing;
- If you need help formalising your company’s software license contracts and strategy;
- If you need help negotiating and structuring a software licensing agreement with a software supplier;
please contact firstname.lastname@example.org
The content of this article is provided for information purposes only and does not constitute legal or other advice.