The 5 Critical Elements of a Software License Agreement
by Ashley Wong | February 3, 2020
Nearly every business will need to sign a software license agreement to purchase and receive services. Many service providers will present a “boilerplate” or “standard” agreement. Still, the truth is, there is no such thing as a standard or boilerplate software license agreement.
When investing in software, business owners must understand what the contract says and, where possible, negotiate for more favorable terms. While negotiating a contract can feel costly in both time and financial resources, failing to negotiate (or at least understand) can ultimately be much more expensive. We are here to guide you through the highlights of any software license agreement to help equip you and your business to identify red flags and negotiate better terms.
Define the scope of the software license agreement
Perhaps the most critical element of any software license agreement is the license itself. When defining the scope of the license, ask yourself the following questions:
What is the “Software” that is being licensed? Is it an entire platform? Or only certain services or features? Often contracts will include a more generic license in the Master Service Agreement that grants a license to any services purchased under a Statement of Work or Purchase Order.
To whom is the software being licensed? While this may seem straightforward, businesses with parent, subsidiary, or affiliate entities should consider whether any of these entities also need to be covered under the license.
Are there any restrictions on the use of the software? Are you given unlimited access to the software, or are they limited to a certain number of authorized users (or ‘seats’)? Are you limited in geographic scope, or is its use permitted worldwide? Is the license for a fixed term or perpetual?
Is the software cloud-based or on-premises?
For what purposes can the software be used? In the B2B contracts, for example, the use of the software is often limited to internal business purposes only.
Protect your data and intellectual property.
I have a good mantra for you: Where there is software, there is data. As we have outlined in prior blogs, the U.S. data protection landscape is continually growing more complex. In turn, that complexity is pouring over into contracts governing the ownership, protection, and use of data, including software licensing agreements.
In addition to general mutual confidentiality requirements, the contract should also consider what kind of data is being collected, used, and shared. The contract should define the ownership terms of any shared intellectual property.
Ask yourself the following questions when reviewing the agreement for data protection compliance:
Is either party required to comply with state or International data privacy laws? If so, the law may dictate specific language that must be in the contract. For instance, the GDPR requires parties to sign a Data Protection Agreement when sharing covered information.
Are there contractual requirements with other parties that impose obligations on contracts with vendors and service providers? For instance, Microsoft requires its vendors to comply with the GDPR and CCPA. It imposes even broader requirements since Microsoft is also extending CCPA compliance to all U.S. users.
Is the data covered under U.S. federal privacy law, such as HIPAA or COPPA, due to its sensitive nature? What security measures does the licensor have in place to protect this confidential data?
Who owns the data (typically, the licensee) and for what purposes, if any, may the licensor use or share it?
Does the service involve white-labeling or software integration? If so, you may need to grant a license to the licensor for the use of its logo or other trademarks, copyrights, or intellectual property.
Allocate the risk among the parties.
Skipping past the dense “legalese” can lead to a very costly mistake. It is critical to read, understand, and (when possible) negotiate the warranties, indemnities, and limitations of liability. The licensor may likely draft the software license themselves. It will provide only minimal protection to you, if any, at all. Your agreement should address what happens when something goes wrong and costs to both parties associated with those events.
When licensing software, businesses should ensure that the licensor is required to indemnify (compensate) them. The indemnity would be for costs or legal expenses incurred when harm arose due to a breach by the licensor or failure of the licensor to comply with the law.
Don’t forget about the limitation of liability! Typically, the licensor’s will place a cap on the amount you can recover without considering the cost a data breach can result in, leaving an unsuspecting licensee (you) holding a bag.
Define the service levels that the service provider must meet.
In addition to the implementation and setup of the software, the parties should also consider what happens when the user has technical difficulties or the service becomes unavailable in the software license agreement. These terms are in a “Service Level Agreement” or “SLA.” Licensors rarely offer SLAs unless the customer asks for one. When reviewing an SLA, consider the following questions to weigh how critical the system and the data is to daily operations:
How and when can the customer contact customer service? Is this included in the fees, or is this an added charge?
What happens when the system experiences an outage or slow load times? Will I receive a credit for failed “uptimes”? The SLA should define response times for events, based on their level of importance.
What happens if the service experiences chronic outages? Paltry service credits can be an unsatisfying remedy when technical difficulties frequently disrupt your operations. An SLA should allow you to terminate the contract without penalty if the service continually fails to meet its uptime commitments.
Define the term and consider when and how the software license agreement can be terminated.
Finally, just like any other contract, the parties must define the term of the contract and when and how termination will work.
Most software license agreements are granted on a term basis and renewed at the end of each term, typically defaulting to “auto-renew.” This model requires you to notify your wishes of non-renewal at least 30 days in advance. The auto-renew model can catch many businesses by surprise when the renewal date passes and find themselves locked in for another year.
Instead, require written agreement to renew, so you do not get caught off guard. This change can benefit you in many ways. First, it shifts the timesuck of tracking renewal dates to the licensor. It creates negotiating leverage for you when the licensor inevitably raises rates each year. And finally, it acts as a touchpoint to evaluate the service and the relationship.
The contract should clearly outline under what circumstances each party can terminate the agreement. Can it be terminated only for a cause? Or can you terminate for any reason, and is there a penalty? How much notice is required? Is a breaching party allowed to cure?
When the time does come to terminate the contract, the contract should clearly state how the transferring of your data to a new system will work.
Enlist help
Having an experienced attorney on your side can give you the upper hand with your software license agreement. Contact Equinox today for peace of mind going into contract negotiations