Software licencing is (the licensor) granting or (the licensee) having the right to use software for a specified term and usually for a permitted purpose.
Whether you are a business looking to invest in business-critical software, a software developer launching a new service/software or an established software house in need of an update to your existing software licences, we are able to assist you.
Licensor or Licensee?
There are certain variables that will affect the approach that should be taken to a licensing arrangement, including whether you are:
- a licensor or licensee; and
- entering into an agreement on a business to business (b2b) or business to consumer (b2c) basis.
Both licensors and licensees will want to ensure that the rights and restrictions set out in the software licence are appropriate to the relationship of the parties and the proposed use of the software.
A licensor’s key concerns will be to ensure that:
- its intellectual property rights in the software are protected;
- the permitted use of the software is clearly defined;
- the nature of the licence is clearly set out, including any limits on the number of users;
- the charging structure and payment terms are clear;
- the scope of its obligations (e.g. relating to support or hosting) are clearly defined;
- its liability is capped at an appropriate level;
- any third party or open-source licensing terms are incorporated into the licence (if appropriate);
- where the software is licensed to consumers, it is compliant with consumer legislation.
A licensee’s key concerns will be to ensure that:
- it has the benefit of an appropriate warranty period to ensure that the software functions properly;
- where the software is business critical, that the licensee will have access to the software and its data in the event that the licensor suffers a disaster and that appropriate disaster recovery plans are in place;
- appropriate service levels are set out with meaningful remedies being available where these are not met (e.g. service credits and/or termination rights);
- it can transfer to another software provider in an orderly manner following the termination/expiry of the software licence;
- where the licensor is processing any data on behalf of the licensee, there are appropriate data protection obligations in place;
- there are sufficient support and/or hosting obligations (where relevant).
Software Licence Agreements
It is important to have a licence agreement in place that is appropriate for how the software is provided and can be used. The appropriate form of agreement will be dictated by the licensing model. The most common forms of licensing agreements are:
- software licence and support;
- software as a service (SaaS);
- application service provision;
- mobile app licence;
- click-wrap software; and
- shrink-wrap software.
Maintaining the confidentiality in and protection of source code is paramount to software developers. However, in uncertain economic climates or where you are contracting with a business who may not have an established trading history, many licensees reliant on business-critical software require the further assurance that escrow can offer should the worst happen to its software provider.
An escrow agreement can be put in place to protect a licensee if certain specified events occur, namely the insolvency of the licensor or the inability/refusal of the licensor to comply with its support and maintenance obligations.
Licensors may be reluctant to put escrow arrangements in place if, for example, their software is developed on an agile basis. The source code can quickly become outdated and so keeping the code which is held by with the escrow agent up to date can be an administrative burden.
Support and Maintenance Agreements
Where support services are available it is important for the obligations to be set out clearly, so that the licensee has assurance that support will be available when required to ensure that downtime is kept to a minimum.
A licensor needs to ensure that it is able to comply with its support obligations and that these are commercially viable, bearing in mind that it will need sufficiently skilled staff and other resources available to deal with its licensees’ support needs. The licensor will also want to ensure it can recover an appropriate fee for its support services.
In particular, the parties should consider the following:
- What constitutes a software defect or fault?
- How are faults categorised and how do service levels vary between the different severity categories?
- Will any support be provided on site?
- During what hours and on what days is support available?
- Are increases in functionality also included in support?
- What are the consequences of a failure to remedy an incident within a specified period of time?
Service Level Agreements (SLAs)
Service descriptions and service levels are closely linked. The service description sets out how the services provided by the licensor will satisfy the licensee’s requirements. The service description must be clear on exactly what the licensor is providing and what the licensee expects to receive, and contain a sufficiently detailed description of the services, setting out each party’s responsibilities.
Licensees may also require the licensor to perform the services in accordance with a set of service levels (sometimes referred to as key performance indicators). The service levels should be incorporated into the main contract, using terminology consistent with the main contract. Service credits may be made available for any variance from the required level of performance.
Business hours, out of hours, response times (physical and virtual), reporting and disaster recovery procedures should all be considered when deciding what service levels are to be measured and what service credit regime may apply.
Termination and Exit Plans
A software licence should clearly state its duration and on what basis either party will have the right to terminate.
A licensor should carefully consider requests from a licensee seeking to remove the licensor’s right to terminate for convenience. Although a licensee may be seeking to ensure business continuity, this is unlikely to be appealing to the licensor as it will lose a degree of control and may be tied into supporting software at a time when it is no longer commercially viable for the licensor to do so.
It is important that termination provisions are carefully drafted. It is usual to see termination rights for each party to terminate where the other party has:
- committed a fundamental breach or persistent breaches of the agreement;
- suffered an insolvency event (this is normally only a right for the licensor); and
- undergone a change of control (again a licensor may only want to have this option so it is not restricted from selling all or part of its business).
A licensee should also consider whether it requires the ability to partially terminate where all or some of the service elements may be brought in-house or transferred to another licensor.
With regards to exit management, it is essential to have an exit plan in place. This plan should set out all rights that the licensee has on termination and what is to happen to the software or any data hosted by the licensor (or a third party).
Third party and Open-source Software (OSS)
Software may rely on or incorporate certain third party or OSS. The source code of OSS is publicly available for use, subject to certain licence terms.
If a third party or OSS is being used, the terms of the relevant licence should be carefully checked to ascertain:
- whether the developer’s intended use of the developed software/service (i.e. the end product incorporating the third party or OSS) is permissible;
- what restrictions may apply (e.g. a restriction on sub-licensing);
- whether it is necessary to flow down certain terms (either in the body of the sub-licence or as a separate set of end-user terms), to ensure that the end user does not put the licensor in breach of the terms of its licence;
- whether any software developed using OSS must also treated as open-source in itself.
Our Approach & Our Experience
We act for a wide range of established software developers and other businesses in the technology sector. Our specialist IT solicitors have a wealth of experience in advising and assisting with the drafting and negotiating of all types of software licences and licensing models, support and maintenance agreements and service level agreements. We can offer clear, practical and commercial advice on the most appropriate licensing structure for your software. Our specialist IT solicitors also have a vast amount of experience in acting for businesses that are looking to purchase new software.
For those who already have their own documents, we can review your current suite of contracts and advise you on how the contracts can be improved to best protect your business interests. We are also able to act as your outsourced legal team providing advice as and when you need it and becoming involved in your projects as they evolve, including contract negotiations.
Our team of Corporate and IT solicitors are ranked by the independent Legal 500 directory. In addition, Partners in our team are recommended by the Legal 500. Therefore, you can be reassured that you will deal with some of the best Commercial Solicitors in the country.
Recent examples of our work include drafting and negotiating:
- numerous multi-million pound software licence, support and maintenance agreements within the insurance sector;
- an international platform licence, maintenance and service level agreement;
- insurance aggregator agreements;
- software licence and service agreements for the provision of Smartphone, iPad and tablet applications and software;
- standard software licence terms and conditions for the provision of software within the public sector;
- a software licence and support agreement incorporating NHS standard terms and conditions for the purchase of products and services to govern the provision of IT and software to hospitals, NHS Trusts and Foundations.
Meet Our Specialists
Home-grown or recruited from national, regional or City firms. Our specialists are experts in their fields and respected by their peers.
Mohammed Akeel Latif
Akeel is a Partner and Head of the Corporate Commercial Team at Myerson
Scott is a Partner in our Corporate and Commercial Team
Carla is a Partner and Head of our Commercial Team
Terry is a Senior Associate in our Corporate Commercial Team. Terry is also the Head of the Brexit Team at Myerson.
Richard is Senior Associate in our Corporate Commercial Team
Joanna is a Solicitor in our Corporate Commercial Team