Key Provisions of a Software License

RECITALS/DEFINITIONS

  • Is there a stated business purpose? If so, is it accurate and not overstated?
  • List an effective date?
  • Verify the correct address and appropriate legal entity of each party.
  • Make sure signatory is authorized to sign.

SCOPE OF LICENSE AND LICENSEE

  • Who is licensed to use the software? Whole company, division, subsidiaries, related entities?
  • If “affiliates” are authorized to use the software (or purchase licenses under the agreement) how is “affiliates” defined? (i.e., % ownership, control by other means such as contract, or some combination?)
  • In what circumstances could this change? Would a change require an amendment?
  • Does the license run only to specific machines or classes of machines? If that machine breaks down can they use a backup? Can they transfer the software from one machine to another at will? With or without additional charges?
  • Internal use only? Can contractors doing work for company use the software? What about outsourcers doing work for the licensee? Or disaster recovery providers?
  • Make copies?       Is written permission needed?
  • Must the purchaser maintain a list of users?
  • Is usage charged: per named user, per concurrent user, per computer, by usage metric (ex: per transaction, per MIPs rating), or some other unit?
  • Is the license limited by geographic territory (Ex: U.S. only, global, specified markets)?
  • Does the license limit use of the software to particular industries or vertical markets?
  • Does the license contain restrictions prohibiting reverse engineering, consistent with applicable law?
  • Intellectual property rights must be clearly stated, i.e., that the licensor retains “all rights, title and interest in and to the Software”, etc., subject only to the limited licenses granted in the agreement. Also, that all rights not expressly granted are reserved.
  • Are there audit rights to ensure compliance with the license?

DESCRIPTION OF PROGRAM

  • Are there any terms that must be defined?
  • Describe what is being licensed. Will the licensee ever need or have access to the source code? If so, will the licensee need to merely view the source code, or modify the source code? For what purposes?
  • Is source code available now, or does an escrow agreement make more sense (for release of source code upon defined events)?

RELATED SERVICES

  • Who will install the software? How complex is the installation? Is this a chargeable service?
  • Is it likely that the licensee will want customization of the software? At the configuration level achievable by the licensee? Or will customization require coding by the licensor?
  • List any training included in the license, describe the level and whether it is on-site, off-site and if off-site whether travel costs are included.
  • What upgrades, patches or support is provided? Are there charges for these or are they included?
  • Is future support provided on time and materials basis? Annual fee? Is telephone/email support priced separately from “maintenance” (upgrades and patches)?
  • Will new versions be priced separately or included in the price of maintenance?
  • Are there service level targets for performance? What are the remedies for failure to meet service levels?
  • Does the licensor retain the right to subcontract some/all services?

DELIVERY

  • Is acceptance complete when shipped, received, when installation is complete, training is complete?
  • Will the product be used in the US only? If not, verify the purchaser is not an embargoed country or denied party on the Department of Commerce or Treasury watch lists. (Note: If the software contains encryption, additional U.S. export regulations may apply.)

PAYMENT

  • Upfront, after acceptance, quarterly, annually?
  • Understand the revenue model – one-time license fee, annual license fee, subscription basis, separate support and/or maintenance fees, installation fees, and training fees? Make certain the contract meets the needs of the company.
  • Understand how commissions are paid and whether the sales force has any risk if a transaction goes bad.
  • Is there a grace period for late payments? Chargeable interest and/or late fees?
  • Responsibility for sales and use taxes.
  • Revenue recognition issues.

WARRANTY

  • Does the warranty cover:
    • Ability to grant the license
    • Non-infringement with third parties IP
    • Apply only to specific equipment (servers, hard drives)?
    • Conformity to documentation (and/or specifications if customized)
    • Disclaims merchantability or fitness for a purpose?
  • Is there a separate payment for warranty or is it included?
  • How can the purchaser void the warranty?
  • If there is a support/maintenance program, does the support/maintenance period overlap with the warranty period, or begin when the warranty expires?

TERM & TERMINATION

  • Is the license perpetual? (Note: The license grant can be perpetual, even if the agreement is not, particularly if the license is a master software license that allows on-going purchases of additional licenses over a period of time.)
  • If annual or periodically how are the renewals done, by evergreen, notice?
  • Can a party terminate for default; do the parties define what notice is required?
  • Does the company have a mechanism to track renewals?
  • Do the parties define the purchaser’s obligations and remedies in the event of a bug, virus or default? Is there an assistance or cooperation clause?
  • What are the parties obligated to do in connection with a default and are there any timing constraints?
  • Is default defined? If so, is a cure period spelled out?

ASSIGNMENT

  • Is assignment prohibited?
  • Permitted in the case of sale of all or substantially all of the assets?
  • Contingent upon successful credit check of assignee?
  • With written permission?
  • Prohibition against assignment to competitors?

CONFIDENTIALITY

  • Does the purchaser warrant that employees and third parties will be informed and bound by the confidentiality restrictions?
  • Does the vendor have audit rights if they have a reasonable basis to believe the confidentiality obligations have been breached?
  • Can the purchaser make copies?
  • What standard of care is required by the purchaser?
  • Must the terms of the agreement be kept confidential?
  • How long must the restrictions be maintained after termination?
  • Must any materials be returned at termination?
  • Are liquidated damages and injunctive relief available if the purchaser breaches this provision?

IMPROVEMENTS/MODIFICATIONS/IP

  • Who owns improvements and modifications? Would the vendor own the improvements and the customer be provided with a right to use? Are improvements and modifications by purchaser deemed a “work for hire” and Licensor retains all rights?
  • Again, IP rights must be clearly stated (see above)

NOTICE

  • Who must receive it? Should the Law Dept. receive a copy?
  • Is the method specified?
  • Receipt verifiable?

HIRING RESTRICTIONS

  • Is there a mutual non-solicitation, non-hire clause?

LIABILITY

  • What are the damage limitations? Are they mutual? Does the agreement disclaim the following damages:
    • Consequential
    • Special, indirect, punitive
    • Business interruption, lost profits
    • Force majeure
    • Cover damages
  • Is the licensee indemnified against third party infringement claims? (Note: Exclude third party and open source components from any indemnification. Limit to company-authored code.)
  • Is there a built in SOL?
  • Are there any insurance requirements?

CHOICE OF LAW & FORUM/DISPUTE RESOLUTION

  • How does the company feel about arbitration and mediation? If so, does it specify the method of choosing the arbitrator, starting the process, discovery constraints, etc.
  • If approved, are these methods binding or non-binding?
  • Does the agreement specify a choice of law and forum?
  • Does the loser pay the fees?
  • Make sure all information exchanged during mediation or arbitration remains confidential and non-discoverable if there is subsequent litigation.

INTEGRATION CLAUSE

  • Does the agreement contain one?
  • What documentation is attached?

PUBLICITY

  • Does the licensor have the right to use the licensee’s name and/or trademark in its published customer lists, marketing materials, media releases?
  • Will the licensee act as a customer and/or media reference?

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