This article has been written by Keerat Kaur pursuing the Diploma in Cyber Law, FinTech Regulations and Technology Contracts from LawSikho. This article has been edited by Zigishu Singh (Associate, Lawsikho) and Smriti Katiyar (Associate, Lawsikho).
Humans have made inventions to ease their own lives and the lives of others. In technology, humans have reached a level of invention, wherein codes have been made to instruct the computer to perform specific functions. Moreover, to ease the conflicts between the inventor and user, they create agreements to be followed by the parties in question; in case they do not, legal obligations will be faced. The idea of writing this article is to understand one of the agreements known as software licensing agreements and further discuss what it is and why it is important. Finally we will dive into the process of drafting it for an international company.
Software licensing agreements
A software licensing agreement is a basic agreement in which a company licenses its software to the licensee. The Licensor makes a profit by licensing its software and on the other hand, the customers’ needs are fulfilled. When we divide the software license agreement, the words themselves give a lot of information.
- Software is a set of information, programs, or applications that instructs the computer to do a specific task.
- Licensing means permitting to use something, and here the thing is software.
- Agreement stands for the legal binding between the parties by agreeing with each other.
A software licensing agreement is an agreement between the company and its customer where the company provides the license to the customer for the use of the software that the company owns. Such agreements contain aspects like how to operate it and install it, period of use, fees, and various other aspects as well.
Importance of software licensing agreement
It is important to have an agreement because of the following reasons: –
Let’s understand this with an illustration. As a licensor, we always want to have long-term benefits from the agreement, protection from copying it, and to have security measures in place for other infringements. You want others to use it according to your rules and regulations, and you also want to limit your liability. Keeping all these points in mind, let us consider the role of an agreement. The agreement gives you the right number of computers that can install your software and what type of users are permitted like educational or commercial and you can also put restrictions on reverse engineering, selling, or transferring the software are usually included in the agreement. Some of the benefits of having an agreement are as follows:
- Prevent misuse of your software: – This refers to a situation in which there is no agreement signed and you give your software for use to a customer. Customers can copy and install it on their computers, and they may use it to make new ones by the use of reverse engineering which will lead to losses. So, here to avoid misuse of the software an agreement needs to exist.
- It gives you the right of making rules and regulations: – Drafting an agreement gives you the right to make clauses according to the needs of the licensor but you should also keep in mind what the customer needs out of it.
- It gives you long-term benefit by licensing rather than selling it: – Selling it will transfer intellectual property to the buyer and your role and opportunities of making profit ends here. But through licensing, you will remain the owner and will be able to keep generating revenues..
- Length of time for using it and terminating it is in your hands: – The duration of usage can be determined through an agreement and also in case any infringement happens, you can terminate the agreement and ask for compensation for the loss you face due to the customers’ actions.
- Keeping minimum guarantee rule: – You can keep the minimum guarantee rule by defining the obligations of both parties and there will be less burden on you,.here will also be lesser chance of disputes
- In an agreement, you can specify a clause where you don’t choose to defend your intellectual property in any forum and avoid litigation costs.
There are no straitjacket rules or clauses to agree on , you can make it depending on your needs and also keep in mind what the opposite party needs out of the deal.
Types of software licenses
- Proprietary Software;
- Custom Software;
- Open-Source Software.
1. Proprietary software: -It is commercial software, the access of which is given after paying the licensing fee. The source code of this type of software is not available, which gives the owner certain advantages.
2. Freeware: -This type of software is basically used for personal work. There is no licensing fee for it. Right to copy and modification as per need is permitted.
4. Custom software: -This type of software will be designed on the order of a company as per their needs.
5. Open-source software: – In this type of software, the source code is available, and it is free of cost. You can distribute it, modify it, and copy it.
Kinds of software licensing agreement
There are three kinds of software licensing agreements which are commonly used: –
- Clickwrap agreements;
- Shrink wrap agreements;
- Browse wrap agreements.
The software downloaded online contains an end-user license agreement in which the user has to click on the “I agree” icon which refers to agreeing to the terms and conditions defined there or on the “I disagree” icon in the alternative. Here, the consent is not in writing but by an action, for example, clicking on the “I agree” icon.
These are in the physical form, for instance where the CD ROM of software is delivered, and it contains the information regarding the agreement on the wrap.
Browse wrap agreements
How to draft a basic software licensing agreement (non-exclusive) for an international company?
Software licensing agreement for an international company is used by companies who own the software and give access to customers based in different countries. A non-exclusive agreement is the agreement in which the Licensor and licensee both are free to use the software and the licensor can give the license to others. The main clauses of an international software license agreement are given and discussed below: –
International software license agreement
- Parties: -The contract starts with giving them information about parties signing the contract. Here the parties are: – one is the company or the person on behalf of the company who has the right of signing the agreement that licenses the software, the other party is the end-user, who uses the software. The personal data of the parties is written over here.
- Definition clause: – Defining the terms which have a technical meaning is essential snce these terms, if not defined, can create confusion between the parties. It would be easy for both parties to clear terms for the smooth operation of the agreement. For example terms like source code, intellectual property, etc. need to be defined properly.
- Scope of the service: – The scope of this agreement is that the licensor provides the software to the licensee for usage under defined terms and conditions in the agreement.
- Term: -It defines the length of the agreement that is usually five years. It is related to termination and renewal clauses.
- Price and payment: – This clause states that the Licensee shall pay the amount to the licensor within the defined period given in the agreement and also include the delivery charges. In an international software licensing agreement, the amount is non-negotiable until the licensor makes the adaptations according to the user’s specific needs. The currency in which the amount shall be paid will also be defined.
- Exclusivity: – This is an important clause of this agreement. It states that the user has the exclusive right to the use of software and cannot share or resell it to a third party.
- Warranty: – This clause lists down all the warranties. Licensor may warranty about the functioning of the software and can limit their warranty for possible damages that may arise.
- Responsibility: – This clause limits the liability of the licensor but cannot be non-existent.
- Intellectual property rights: – This clause determines the ownership of the software. In a software licensing agreement the intellectual property rights are not transferred to the licensee but remain with the owner of the software.
- Termination of the contract: – This clause mentions the circumstances under which the agreement can be terminated. This clause is established against any fraud and/or breach of obligations defined in the contract.
- Notices: – This clause gives the specific procedure for providing the notice. Giving the different channels of communications only through which notice will be considered as served.
- Expenses and taxes: -This clause states that the licensee will be responsible for the payment of taxes imposed on licensing the software and all the expenses that occurred during the process of delivering software.
- Applicable law and competent jurisdiction: – In case a dispute arises between the parties, this clause helps to refer to the competent jurisdiction under which the case will be decided. The law which applies to this agreement will be provided. In the Software License Agreements, when the user (Licensee) is a consumer, the competent jurisdiction will be one of his or her domiciles; on the contrary, if it is a company for which custom software has been made, it will normally be the jurisdiction of the Licensor.
How to avoid mistakes?
Some of the common software licensing mistakes: –
- Software licensing agreements are known for their complexity. So, ensure that while drafting the agreement you go through each term and clause carefully to understand what exactly is being provided to the licensee. It is crucial to have the knowledge with respect to the variations in the licensor’s standard software agreement that could occur each year during the renewal of the agreement.
- Keep a detailed record of usage of software licensing to avoid risk during a software audit.
- Company’s Staff and employees must be trained with the process and policies of installing the software on the company’s data processors.
- While licensing the software keeps one thing in mind which is flexibility, it can change the whole of the agreement. It can give the licensor an advantage in the future.
- While drafting the agreements keep in mind the technical considerations, business considerations, and legal considerations.
- Lack of planning could be one of the biggest mistakes that could waste a lot of time and money. Licensee companies should consider what they need and don’t pay for the license unless they need it.
- What if the licensor goes out of business or is shut down? Who is going to provide support and maintenance?
In this case, the escrow clause comes into the picture. The Licensor shall deposit the source code, object code, and related documents into the escrow account. The Source code, object code, and related documents shall be released after the termination of this agreement or in the event of non-renewal of the agreement.
After the detailed discussion on the software licensing agreement, it is clear that “install, run and use the software” is not the smooth and short process it seems s but a complicated one that needs rechecks, focus readings again and again. It may be installed automatically or manually as well. So, next time think twice before blindly clicking on the “I agree” icon as they all are valid contracts, and you could be liable for the terms and procedures mentioned in the agreement. So, a software licensing agreement is an important tool to protect the licensor from fraudulent and unlawful use of their software.
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