Software Licenses

KEY CONSIDERATIONS: SOFTWARE LICENSE AGREEMENTS 

Negotiating software license agreements can present special challenges for procurement professionals. The following items may be helpful in highlighting some of the key factors to consider. These considerations apply to negotiated license agreements, and not to so-called off-the-shelf software programs covered by "box top" or "shrink wrap" licenses customarily obtained for routine mass-produced software programs.  

1.      Specify the licensee's specific start and end dates. Avoid ambiguous terms like "one year" or automatic renewals for extended periods. Require prior written notice (e.g., ninety calendar days) of any expiration or renewal dates. If the license is not perpetual, make sure it can be renewed at the Company’s option on the same terms and conditions for an agreed upon renewal fee. Agree on the renewal fee(s) up front so that you don’t become “hostage” to the software.  

2.      Specify the scope of the license agreement. A software license can be broad or narrow in scope. For example, a corporate license typically applies to all central processing units ("CPU's") throughout the Company. A system license is applicable to all components of the particular system. A site license covers all CPU's at a particular site. A CPU license would apply only to a particular unit. The license should reflect that the licensor will provide all information and documentation needed to make effective use of the software, including, but not limited to, functional specifications, user manuals, flow diagrams, and file descriptions.  

3.      Obtain the right to make back-up copies. The license should allow the Company to make back-up copies of the software for security or disaster recovery purposes. The license should also allow the Company to make copies of related materials such as user manuals. 

4.      Ensure that the license can meet operating needs. The license should provide that the Company has the right to use the software on backup CPU equipment during those periods when designated CPU's are out of service. In the case of a site license, the license should extend to any additional equipment the Company may add to that location in the future. The license should also permit the software to be used at designated off-site locations in the event of business interruption or emergency (Disaster Recovery).  

5.      Obtain the best possible warranty for the software. The warranty should provide that the software will do what the vendor has represented or promised it would do and that it will meet all its functional specifications. The warranty should also specify that the software is free from defects and that the vendor will correct any errors within a specific time at no additional cost to the Company. If correction is not possible, the vendor should replace the defective software or, at the Company's option, refund the purchase price.  

6.      Retain the right to make modifications. Specify that the Company is free to modify (make changes that alter its basic function) or to create peripheral programs. Naturally, the vendor's warranty would not extend to any portion of the software that is modified. Nor would the vendor have any rights in or liability for modifications or peripheral programs which might be created. Try to avoid licenses where modifying any portion of the software voids the entire warranty. Also avoid licenses which "grant back" to the vendor proprietary rights to modifications or peripheral programs.  

7.      Obtain the option to have certain services provided. Retain the option to have the vendor provide maintenance support services beyond its warranty period for a specific charge (or no charge). The Company could also obtain the option to have the vendor install the software being licensed. Obtain the right to be provided with changes, upgrades, improvements, or future developments to the software at no charge. Require that the Company receive written notice of any software imperfections or improvements that are discovered or made during the term of the license.  

8.      Obtain adequate assurances as to non-infringement. The licensor should represent that it owns the software and has the right to license it to the Company. It must agree to defend, indemnify, and hold the Company harmless against any and all claims or suits alleging that the Company's use infringes on any patent, copyright, or other proprietary interest. Where the Company's use is found to constitute an infringement, the licensor should be required to replace or modify the software in a manner acceptable to the Company so as to avoid any infringement. If the use of the software is temporarily restrained or enjoined by court order, the licenser should remove such restraints by posting a bond or taking other action.  

9.      Secure reasonable limits on non-disclosure requirements. It is reasonable to agree that the Company will not disclose proprietary software to third parties. However, such restrictions should be reasonable and should not apply to information which is already in the Company's possession, or independently derived or acquired. Moreover, the licensor should likewise agree not to disclose any of the Company's confidential or proprietary information which the licensor may obtain. 

10.     Obtain the right to assign the license. The Company should have the right to assign the license to any parent, subsidiary, affiliate, or any other legal entity the Company may elect to create in the future. Strategic changes in how businesses are structured can lead to the creation of radically redesigned organizations. Software licenses need to be flexible enough to accommodate the creation of subsidiary, affiliate, or new entities. Since software licenses sometimes limit use to "employees of the licensee", care must be taken to ensure that employees and agents (e.g., independent contractors hired to perform maintenance or other services, including outsourced functions) of the assignee are likewise permitted access to the software. 

11.     Obtain the right to conduct appropriate trials or tests. The Company should secure the right to conduct appropriate acceptance tests and inspections of the software and associated documentation so as to ensure that they meet the Company's needs and requirements. In addition, a trial use agreement or period can be agreed upon, during which the Company can evaluate the software and its associated documentation. 

12.     Obtain appropriate termination rights. It is very important to ensure that the licensor only terminate the license for material breaches that remain uncorrected after appropriate notice, as well as avoiding having to comply with onerous conditions upon termination. Upon termination, the Company may agree to either retain or destroy the software, if requested to do in writing by the vendor.  

These considerations are only a summary of some concerns that need to be addressed in the context of software licenses. The particular facts and circumstances regarding individual transactions will affect how you prioritize considerations.  

X. Paul Humbert, Esq. has over twenty years of legal experience in negotiating and structuring complex commercial transactions of all types. Mr. Humbert heads The Humbert Group (“THG”), specializing in assisting management professionals in all phases of execution and process improvement. He is a part-time lecturer at Rutgers University where he teaches Contract Management to MBA candidates Mr. Humbert has served as an adjunct professor of law at both Seton Hall Law School and Monmouth College. He has also served as an arbitrator for the American Arbitration Association. Paul has co-authored: Contract and Risk Management for Supply Chain Professionals; Model Contract Terms and Conditions with Annotations and Case Summaries; and Build Your Playbook for Managing Supply Chain Transactions.