This article is written by Kiran Krishnan who is pursuing a Diploma in Cyber Law, FinTech Regulations and Technology Contracts from LawSikho.
The advancement of technology has indirectly brought along several job opportunities in various sectors. One such field which bore the fruits of technological development is law. There is an increasing demand for lawyers with an expertise in the technology law domain. However, most of the legal professionals today are not prepared or rather lack a thorough understanding of the technological aspects required to work in the growing technology industry. Some of the notable advancements in recent years in information technology are Artificial Intelligence, Machine learning, Cloud Computing, and cognitive systems designed to predict and detect errors in software.
The ever-increasing innovation in technology, however, is accompanied with plenty of legal issues for the concerned businesses. A few key legal issues include data security and data privacy in cloud computing, compliance with software license terms and conditions, and infringement of another party’s copyrighted content, among others. The aforesaid issues can be prevented from happening or be systematically dealt with if occurred, by entering into well drafted technology agreements. First, let us understand the questions a technology lawyer must ask to get certain insights from the client about his/ her business requirements and thereby draft a fool-proof technology agreement.
Useful pointers to ensure a well-drafted Technology Agreement
- Ask the client about the exact scope of the work or business. This information is essential because the client knows and understands the issues the company wants to solve, the objectives of the company, costing, business process and other requirements. Therefore, such information must be clearly defined and communicated to the concerned lawyer.
- Discuss with the client about how they wish to structure the deal and the potential risks that may arise therefrom.
- Enquire about the commercial purpose of the agreement. It is extremely crucial to find out why the client intends to enter into an agreement and what type of agreement he or she prefers. The subject matter and nature of the agreement is of paramount importance.
- Communicate and interact with the client’s personnel in the concerned departments. Such personnel will be apt in explaining the commercial and technical aspects of the project. Obtaining essential information of the technology will help in understanding the corresponding legal risks regarding that technology.
- Go through the design documents and manuals to get more information about how the technology works and how it is used. This piece of information helps in drafting a watertight clause in cases where the client is a software vendor, and he wants to properly identify the software and mention the limitations within which the customer can use the said software.
- Provide a written quotation to the client covering the required aspects of the job once you have understood the scope of the work.
- Understand each party’s role and possible concerns and issues in the potential agreement.
- Think of a way or ways in which a dispute or unforeseen event could be resolved.
Let us now understand the different types of technology agreements and the key clauses in each agreement.
Types of Technology Agreements
The different types of technology agreements are:
- Software License Agreement: In this Agreement, the software vendor grants the customer rights to own, use, modify or redistribute the software (depending on the requirements and terms of the agreement). Examples of Software License Agreements are shrink-wrap agreements, click-wrap agreements, browse-wrap agreements, end-user license agreements (“EULA”) etc.
The key clauses in a Software License Agreement are as follows:
- License to use: The clause must clearly define the software to be licensed. A typical licensee may include software user, software publisher, a technology escrow agent, joint venture partner, distributor of software, a person who adds codes to the software, among others. Therefore, it is crucial to identify each aspect that is desired to be licensed including documents, user manuals, modules, functionalities, and products regarding the software.
Here is an example of a typical license clause:
“Software refers to the Vendor’s [Name of software] software application version 1.0 in object code format with the following modules, Remote Access, Remote Wipe, Data Recovery.
The Licensed Product includes Vendor’s standard user manuals and other documentation for such software.”
- Nature of License: The clause typically states that the software vendor grants a limited, non-exclusive, and non-transferable license. The fact that it is limited means that the vendor only allows the user or customer to use the software for specific and limited purposes. Such a license cannot be transferred by the user to anyone. Besides, the non-exclusivity of the license implies that the vendor can freely sell the software to anyone else. It is also important for the vendor to properly identify the software and any additional documentations and/ or manuals as a package and whether any modules and/ or functionalities are licensed separately or together with the software.
Here is a sample “nature of license clause”:
“Vendor hereby grants to the Customer a non-exclusive license to reproduce and use [_] copies of the Licensed Product for the Customer’s internal business purposes, provided Customer complies with the restrictions set forth in this Section [_].”
- Term and Termination: The term must be as specific as possible. In case the user has obtained a trail version of the software, the license will be valid for a limited period. However, if the user has purchased a paid version of the software, the license will be valid for a perpetual or indefinite period. In this case, the term will expire at the end of the period or end of the year in case the software was subscribed annually. The term may also be renewed if the user desires so.
The termination clause ensures that the agreement shall be terminated in case any party breaches the agreement. Examples of a breach include installation of the software in more devices than otherwise specified in the agreement, sublicense or transfer of software even though it is specifically prohibited. Besides, the agreement may be terminated for convenience. In the above-mentioned cases, the user is required to stop using the software, delete the software and/ or return the software.
Here is an example of a typical term clause and termination clause:
“If you have acquired an evaluation Use or beta license, then the term of the License shall coincide with the Evaluation Period and shall terminate upon the expiration of such term. If you have acquired a Full Use license, then the term of the License shall be perpetual unless the terms of Your initial purchase of a Full Use license were for an annual subscription (in which case the term of the License shall coincide with the designated subscription term and shall terminate upon the expiration of such term unless You renew the License).”
Termination (Clause 4 of Corporate End User License Agreement with McAfee as Licensor)
“Without prejudice to Company’s payment obligations, Company may terminate Company’s License at any time by uninstalling the Software.
McAfee may terminate Company’s license if Company materially breaches this Agreement and Company fails to cure the breach within thirty days of receiving McAfee’s notice of the breach. Upon termination, the Company must promptly return, destroy or delete permanently all copies of the Software and Documentation.”
2. Software Development Agreement: It is an agreement between a software developer and a client or company wherein the software developer is hired by the company to develop or create a software. The software developer may create the software for private as well as commercial use. In this agreement, the software developer works according to the terms and conditions of the company. Examples of Software Development Agreements are Agile contracts, Waterfall contracts etc.
The key clauses in a Software Development Agreement are as follows:
- Intellectual property (IP) rights: From the perspective of the client or company, a clause must be incorporated which states that the company shall obtain ownership of IP over the software once the developer finishes the development work of the software. The clause typically states that the ownership rights and the IP rights of the software being developed by the software developer will belong to the client once developed. The developer, on the other hand, is entitled to use and reuse the source code and object code of the software, and any other material created by the developer. However, the developer may use the software only for its internal purpose and is not permitted to share or use it for a third-party.
- Term and Termination: This clause typically states that the agreement commences on the effective date and goes on until the parties have fulfilled all the obligations or until the agreement gets terminated otherwise. Hence, such an agreement excludes a definitive date of expiry of the term. Rather, the agreement generally expires when the developer completes development of the software and the client is satisfied with it or if it is otherwise terminated for different reasons. The reasons may include default in any material obligation by either party as per the agreement; bankruptcy or insolvency of either party’s respective organisation; or insolvency or bankruptcy proceedings filed against either party; or death or disability of the developer.
- Developer’s Warranties: This clause must typically require the developer to ensure the client that the software remains compatible with the hardware and the applicable system. Besides, the developer must warrant that the software being developed meets the performance criteria set out in the specifications and that the software is free from material defects. The clause also covers that the developer shall provide maintenance and support to the client in case of any software issue.
An example of a typical developer’s performance warranties clause:
“The Developer warrants to the Client that the Software:
a) will be compatible with the Hardware and the applicable system software;
b) will provide the functions and meet the performance criteria set out in the Functional Specification; and
c) will be free from material defects.
If at any time before [stipulated period] months after the date the Software is ready for use, the Developer becomes aware or the Client advises the Developer of any failure of the Software to comply with the warranties given under [clause], the Developer must promptly correct that failure [notification].
All the remedial work or replacement of the whole or any part of the Software carried out by the Developer is warranted by the Developer to the same extent as the Software from the date the work was completed, or the part was replaced as the case may be.”
- Non-compete: This clause is crucial in an agreement like this. The clause ensures that during and after the agreement for a particular period, the developer does not become a direct competitor to the client. Besides, the developer is prevented from engaging with a competitor of the client. The client’s business is prevented from being harmed with the help and presence of this clause.
- Non-solicit: This clause ensures that neither party hires or solicits the officers, directors, customers, projects, and/ or employees of the other party or its subsidiaries, if any. Besides, neither party must attempt to induce any officer, director, customer and/ or employees of the other party or its subsidiaries to leave their employment.
3. Cloud Computing Services Agreement: In this Agreement, the cloud service provider and the customer agree that the cloud service provider will provide access to:
- Software (SaaS),
- Platform including hardware, software stack, development tools to run, develop and manage applications (PaaS), OR
- Computing resources such as physical servers and/ or virtual servers, networking, storage resources (IaaS).
over the internet. The cloud service provider does not provide software to the customer but merely access to it and/ or the aforesaid resources via the internet.
The key clauses in a Cloud Computing Services Agreement are as follows:
- License: To provide cloud services, the service provider is required to provide a license to the customer to access the cloud services. Some of the services include IaaS, PaaS, or SaaS etc. Here is an example of a license clause commonly used in case of a SaaS provider:
“During the term of this Agreement, Customer may access and use Vendor’s service (“define the Service”) pursuant to Vendor’s policies posted on Vendor’s website at “www.______”, as such policies may be updated from time to time. Vendor retains all right, title, and interest in and to the Service, including without limitation all software used to provide the Service and all logos and trademarks reproduced through the Service, and this Agreement does not grant Customer any intellectual property rights in the Service or any of its components.”
- Data security and confidentiality: In cases where the company processes its customers’ personal data, the responsibility of ensuring protection & safety of the said personal data is that of the company. Therefore, the company entering into a cloud services agreement with the cloud service provider, must make sure that it insists on incorporating a clause covering implementation of effective security measures, and such measures qualify as “industry standard” regarding the company’s personal data (i.e. personal data of the company’s clients) as such data will be stored on the cloud servers of the service provider.
Secondly, it is important that the company incorporates a clause which defines confidential information. Such information shall be that which the company considers of crucial importance. Besides, the company can incorporate a clause assigning a responsibility on the service provider to not disclose the confidential information to any person or entity unless necessary. The company may incorporate a clause to implement periodic audit review of the service provider’s data protection policies and procedures and the company must be informed of the review.
Clause 4 in Oracle Cloud Services Agreement wherein Oracle is the cloud service provider states that the parties in the agreement are required to disclose and define information they consider confidential. Further, the clause requires such information to be limited to the terms and pricing as mentioned in the agreement. Besides, it is mentioned that certain types of information are not considered confidential such as information belonging to either party that is independently made available to the public; information of one party with the other party by lawful means before such party has disclosed it to the other party; information of one party shared by a third-party with the other party without any restriction; or information of one party independently discovered by the other party.
- Ownership rights and restrictions: The intention of this clause is to protect the intellectual property rights of the parties. Therefore, it may be stated that the client retains the IP rights in its content that is stored in the cloud. Besides, it is stated that the cloud service provider retains the ownership rights in “the services” and derivative works as may be defined in the agreement. The clause must further include that the client may access third party content through the cloud services, but such access may be regulated by separate terms between the third party and client and is not the responsibility of the cloud service provider. The clause must also prevent the client from modifying, reverse engineering, reproducing, or copying any part of the cloud services of the cloud service provider either directly or by allowing a third party to cause the aforesaid.
With the advancement of technology, we are already able to negotiate contracts including technology contracts on websites or even over email in the comfort of our homes or while sitting at our workplace located in a different region, state, or country from that of the other party. This is because of section 10A of the Information Technology Act, 2000 which recognises electronic contracts as valid and enforceable where such contract is proposed, communicated, and accepted in electronic form.
The cost is certainly not clear due to few challenges faced by technology contracts such as poor communication, improper negotiation, poor review of contract etc. Despite the aforesaid challenges, the future is one with technology and smart contracts and hence, the meeting of minds in both the fields of technology and law will work towards achieving a better future of technology contracts. Therefore, one can rest assured that there will be light at the end of the tunnel.
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