This article is written by Mehar Verma, a 3rd-year law student from Jindal Global Law School. In this article, the author talks about the meaning and applicability of the software license agreement.
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Software license agreements are entered into when an owner or a developer of software wants to provide his product to the market without selling it. The agreement lays down the terms and conditions of the usage of the software and protects the rights of both the owner and the user.
The agreement protects the copyrighted software from fraudulent activities and ensures that the time and money of the developers is not wasted. If A Ltd. wants to lease its software to B, they would enter into a software licensing agreement, which would allow B to use the software for his benefit, in accordance with the terms and conditions of the agreement.
What is a software licensing agreement?
A software licensing agreement is a legal contract between the owner of the software and its purchaser. The main objective of the software licensing agreement is to protect the interest of the company selling the software as well as the purchaser. The agreement acts as a full package to the purchaser, containing details like from where, how and the number of times it can be installed, the price of the software, restrictions on the use of the software. Additionally, the agreement also mentions the purchaser’s ability to copy, modify, or redistribute it.
For example, Company A ltd is a tech company dealing with voice modulation software and B a budding musician is interested in purchasing their software. Now upon payment of the required fees, A ltd and B enter into a licensing agreement and according to their agreement, B is granted a limited, nonexclusive and nontransferable licence, to use the voice modulation software. The agreement licence may also impose certain restrictions on B, such as B may not be allowed to permit other individuals to use the software, or he may not be allowed to modify it, copy it or reproduce it.
Why do you need a software licensing agreement?
As a software developer, you must have spent a lot of time, money and effort in the building of your software. To ensure that all the efforts are worthwhile and to bring monetary gains, your software must be protected. The agreement protects the copyrighted software from various frauds and infringements. Below are the five main reasons why every software developer should enter into a software licensing agreement before selling your software.
Prevents abuse of the software
If there is no licensing agreement between the seller and the purchaser, the seller can easily sell the software or duplicated without the permission of the owner. This makes your product easily available in the market, and you as a developer do not get the profits or the recognition. Lack of a licensing agreement leaves you nowhere as no remedy can be sought for misappropriation of your product. Thus a licensing agreement prevents the abuse of the business and the software.
Allows licensing of the software
To make your product available in the market, you can license it through the agreement and not necessarily sell it. Licensing of the software is better as it allows you to retain all rights and impose restrictions on the usage of the software. Further, it gives you the liberty to license the software to more than one customer and make money in the long run.
For example, A Ltd company’s voice modulation software is unique and is high on demand. If A sells his product to one customer, he loses all his rights and would not be able to make an income from his invention. However, instead of selling, if they license their software, they will not only be able to impose restrictions but can they can license it to more customers, thus making more money.
Allows to disclaim warranties
Every customer would have different expectations from the software you are providing and sometimes these expectations are beyond imagination. To prevent such situations the company can include a disclaimer of warranties clause.
For instance, B a customer of A Ltd purchased their voice modulation software and due to some software bugs, he lost his data. Subsequently, he filed a suit against A ltd, claiming remedies for the damages occurred. Now A Ltd. could argue that as per their agreement there was no guarantee that the software will be not bug-free and as B agreed to accept the software as it is, there is no liability on A ltd.
Limits your liability
Not limiting the liabilities, makes a company subject to several lawsuits. These lawsuits damage the reputation of the company, consumes time and at the same time require financial assistance. Thus it is important to have a licensing agreement that limits your liability and prevents the customers from initiating lawsuits. However, the liability clause should be reasonable and fair to both parties.
Allows termination of usage
A license agreement of software, allows the owners to terminate or suspend the licensing agreement at any point in time, if the terms of the agreement are not complied with, thus retaining the complete control over the software at all the times. For instance, while purchasing the software, from A Ltd, B had signed an agreement that he would install the software only on the approved devices or his contract would be terminated. B breached the contract, giving A Ltd. the liberty to terminate the contract.
Types of software licenses in India
The software licenses in India can be broadly classified as proprietary licences, free software licenses, and open source licenses.
Proprietary software licence
The proprietary software is computer software that is licensed by the owner of the copyright under very specific terms. In general, it is the most restrictive type of licensing agreement wherein the original code was written by the programmers are not available to the users.
Thus they can use the software but they cannot modify it or redistribute it. This software is also known as the closed source software and the operating system of windows and Mac is an example of proprietary software. To protect their intellectual property, the companies enter into proprietary software licences.
Free software license
Free software licenses have lesser restrictions than the proprietary software licences. The software can be freely used by the users to modify the software, or redistribute it, which would otherwise be prohibited by copyright law. Thus free software license is entered into by the owners of the software when they wish to provide the recipients the privilege of modifying or redistributing the copyrighted work.
Open-source software license
The open-source software license allows the user to make modifications to the software and make the source code available or transparent. As the license allows other developers to see the original code, it is usually developed as a public collaboration and made freely available.
The license does not restrict any party from selling or redistribution of the software as long as the distribution is made under the same terms as the license of the original software. The General Public License or GNU is an example of an open-source software license that was developed as a result of collaboration and research of open developer communities.
What should a software license agreement cover?
A software license agreement can be divided into four sections and each section covers an important aspect of the legal contract. The four sections can be broadly classified as follows:
- General information: The first section in the agreement lays down the type of agreement, when the contract comes into effect, duration of the agreement and other general information that is necessary to set the tone of the entire agreement.
- Parties involved: This section provides the details of the parties entering into the contract. The name and address of the company selling the software as well as the full name and address of the purchaser are provided in the agreement. Further, the agreement specifies whether the purchaser is a corporation or an individual.
- Terms of this agreement: This section is considered the most important part of an agreement as it lays down the terms and conditions of the agreement. It would include the fee of the license, information about maintenance, services and refund policies if any. It would also include whether the code of the software would be provided, or whether the user is allowed to install the software in more than one computer, etc.
- Final details: This section is personally modified and would contain all the details that were not covered previously. This section also contains the signature of both the parties and the date of signing.
What are the important clauses of the software license agreement in India?
The four sections mentioned above only provide an overview. But to protect oneself and to ensure that a well proof agreement is entered into, the legal contract must contain the following clauses.
If the offeree entered into an exclusive agreement and there is no clause of non-exclusivity, then it imposes a hindrance for further licensing of the software.
For instance, A ltd licenses his voice modulation software to B and their agreement has a non-exclusivity clause. C and D are also interested in A Ltd’s software, as A Ltd entered into a non-exclusive contract they can further license their software to C and D as well and continue to make more profits.
The non-transferability clause in an agreement does not give the licensee the right to transfer the software to a new client or customer. This makes sure that your customers are not reduced and further that you do not have an enforceable agreement with a third party.
For example, when A Ltd licensed its software to B, the agreement did not contain a non-transferability clause. Now, C, an interested party instead of leasing the software from A Ltd, got it from B. This would result in a loss to A Ltd which would increase exponentially with every transfer.
By including a clause that protects your rights even after the execution of the agreement is important to protect the product. These rights include copyrights, intellectual property rights, and distribution rights. The rights would ensure that no component of your product is stolen by any user or the market.
In case you do not want any kind of modifications to be made to your software or product, your agreement should provide so. The clause should define the meaning of modifications and the restrictions imposed on such modifications. This is the best way to ensure that your software retains its original content.
Breach of contract
A breach of contract clause should be included in the agreement. This clause specifies that if any condition or terms of the agreement are not complied with, the licensee has the liberty to revoke the contract. For example, A Ltd while leasing its software had provided with a no modification clause and B modified the software according to his needs. In such a situation, A Ltd has the liberty to revoke the contract without attracting any liabilities.
Limitation of liability
This clause mentions that the licensee has accepted the software in its current position and that there is no warranty for the usage of the software. As discussed earlier, this clause provides a shield to the company leasing the software. Without this clause, the company would be open to unlimited lawsuits.
This clause provides the law or court that would have jurisdiction in case any disputes arise.
For instance, A Ltd and B enter into a software license agreement. Later, they had a dispute and B filed a petition in one of the District Court of Delhi. A Ltd contended that the suit is not valid as the governing law clause of their agreement provides that all disputes arising out of the contract would be settled through arbitration in Mumbai. Thus, in this case, all disputes will be resolved through arbitration in Mumbai and no other Courts would have jurisdiction.
The software license agreement is a necessary tool to protect the rights of the owner as it prevents abuse of the software, allows licensing of the software, allows to disclaim warranties limits the liabilities of the owner, and allows termination of usage.
As per the needs of the software license, they can be broadly classified as proprietary software licences, free software license, and open-source software license. Proprietary software licenses are commonly used while distributing operating systems like Mac and windows and have restrictive terms and conditions.
Free software license has lesser restrictions as compared to proprietary software license whereas open-source software license allows the software license to be developed as a public collaboration.
Some of the important clauses that every software license should include are non-exclusivity clause, non-transferability clause, rights clause, modification clause, breach of the contract clause, limitation of liability clause and governing law clause.
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