The SIIA Guide to Licensing Software as a Service

Transcription

The SIIA Guide to Licensing
Software as a Service
A White Paper of the SIIA Software as a Service Licensing Roundtable
Software & Information Industry Association
1730 M Street NW Suite 700, Washington DC 20036
+1.202.452.1600 | www.siia.net
ACKNOWLEDGEMENTS
The Software & Information Industry Association's (SIIA) Licensing Roundtable produced this white paper as a
means for the software industry to explore the issues as software licensing concepts and tools are developed and
applied to the delivery of software as a service. This document defines key licensing provisions, discusses the
differences between "traditional" shrink-wrap licenses and application services licenses, and offers examples of
licensing language for use in agreements between service licensors and licensees.
The members of SIIA produced this paper with the assistance and facilitation of SIIA staff. The Licensing
Roundtable collaborated on this document providing expertise and resources to help determine the issues to
consider in moving to this new model. We gratefully acknowledge and thank the following contributors who
made possible this white paper.
Contributors:
Peter Grimes, New Moon
Brent Gushowaty, SoftSearch
Peter Evans, FloNetworks
Patrick Martell, Sybase Corporation
Bobbi Jo Maxwell, Ingram Micro
Al McIlroy, TechEra
Tom Melling, ELF Technology
Susan Worthman, Into Networks
John Tomeny, Sassafras Software
SIIA Staff:
Michael Kerr, Project Manager
Keith Kupferschmid, Counsel, Intellectual Property
Fred Hoch, Director, eBusiness Division
SIIA Guide to Licensing Software as a Service
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TABLE OF CONTENTS
Foreword .....................................................................................................................................4
Audience......................................................................................................................................4
Overview .....................................................................................................................................5
The Environment for Software Service License Agreements............................................................5
Dynamics of Software Service Negotiations and Transactions .........................................................6
The SIIA Guide to Licensing Software as a Service ........................................................................8
Overview of the License ...................................................................................................8
Analytical Framework.......................................................................................................9
1. Preamble and Identification of the Parties.......................................................................9
2. Recitals ........................................................................................................................9
3. Interpretation of the Agreement ...................................................................................10
4. The Agreement...........................................................................................................11
5. Underlying Rights, Ownership of Intellectual Property..................................................16
6. Fees and Terms of Payment.........................................................................................18
7. Term, Default and Termination ....................................................................................20
8. Liability .....................................................................................................................22
9. Warranties and Indemnities .........................................................................................23
10. Choice of Applicable or Governing Law.....................................................................25
11. Assignment...............................................................................................................26
12. Amendments and Modifications .................................................................................27
13. Force Majeure...........................................................................................................27
14. Dispute Resolution ....................................................................................................27
15. Notices.....................................................................................................................29
16. Relationship of the Parties .........................................................................................29
17. Entire Agreement......................................................................................................30
18. Severability ..............................................................................................................30
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Preface
Foreword
Whenever SIIA releases a guide, backgrounder, or best practices white paper for the industry, we are often
asked to state the objective for the deliverable. Generally, it's difficult to identify a single purpose because our
working groups and their products are many things to many people. However, in conversations that took place
among staff and members while developing this document, we concluded that this work serves the following
purposes:
-
While there may be many available resources on licensing in the software marketplace, we have had
innumerable questions from our membership on the subject of licensing in the emerging software as a
service -- or hosted applications -- market. By creating the Licensing Roundtable and this first work
product, we hope to provide some answers, alleviate concerns and help members network with people who
have done some thinking about the issues.
-
While the definitive work on licensing in the software as a service (SaaS) market is improbable given the
nascent stage of the service model, we endeavor to make our members aware of critical issues that must be
addressed in crafting a license for a relationship of this nature.
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Participants enjoy the collegial aspects of the process, which allows for open discussion of any question
that comes to mind.
While we are pleased to provide you with The SIIA Guide to Licensing Software as a Service, we must offer a
couple of caveats to the readers of this work. The sample contract provisions contained in this document are not
intended to be utilized "as is." They are intended to act as a starting point for analysis, not an exhaustive review
of all possible concerns.
The law relating to new technologies is constantly changing, as are legal arrangements and the ways that
intellectual property can be licensed. As such, any discussion of relevant terms and conditions should be
carefully reviewed in light of the most up-to-date technological and legal developments, and in light of your
own circumstances. Users of The SIIA Guide to Licensing Software as a Service are encouraged to consult legal
counsel and tailor contracts to their circumstances and requirements, as well as to the law of the jurisdiction that
will cover their transaction.
Audience
This document addresses issues facing independent software vendors (ISVs) and the wide array of service
providers (xSPs) who are developing application services for delivery over the Internet and other TCP/IP
networks.
The SIIA Guide discusses matters, which may arise in executing agreements between independent software
vendors and application service providers of all kinds (xSPs). Certain sections of The SIIA Guide (such as the
discussion around Scope of Services and Service Level Agreements) are more closely related to end-user
license agreements between xSPs and the hosted application customer. However, since most distribution
licenses between ISVs and xSPs will include some standards regarding service levels to the end user, we
decided to include this issue, and others of importance to end user agreements.
With regard to the style of The SIIA Guide, the document contains some introductory definitions and
explanations of the terminology, as well as an introductory overview of recent developments in software
services licensing. But, generally, the document is intended for readers who possess above-average levels of
familiarity with software licensing concepts and the hosted applications market.
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Overview
Companies blazing their way into the software services, or hosted applications, marketplace are hoping to tap
into a revenue stream that some forecasts estimate will grow to over $22 billion by 2003. Even without the rosy
revenue scenarios, there is little doubt about the power of the momentum moving software services forward.
Indeed, the Gartner Group predicts that up to 40 percent of all applications may be delivered over the Internet
within the next 2 to 3 years.
As the software as a service market expands, it is evident that new breeds of companies are emerging and,
accompanying them, new types of transactions and business relationships. As in all developing markets,
vendors, customers and end-users must modify – or create entirely anew – the legal and licensing concepts and
regimes that govern transactions and relationships. Of course, companies entering the market will have past
experience as a guide, as well as the familiar legal tools in their repertoire. But, to create a solid legal
infrastructure for the sale of Internet-based application services, companies playing in the SaaS marketplace are
well-advised to supplement experience with new thinking and tools that address all the potential risks and
pitfalls inherent in new paradigms.
The Environment for Software Service License Agreements
Most software industry executives believe -- and have made business decisions on the assumption -- that
software subscriptions will become increasingly prevalent, especially for "middleweight" enterprise software
and business productivity applications. Industry analysts also predict that, over the next few years, software
vendors will increasingly promote subscription-type licenses. Mirroring the move to dis tribution as a service,
software licensing is changing, too, with usage-based licensing on the rise and many new pricing models
emerging. Driving these trends is the desire for a more predictable flow of license sales. Ultimately, vendors
would prefer to trade in the large initial license sale and users who skip upgrades and new versions for a
consistent revenue stream from their customers spread out over the life of a contract.
While software as a service looms on the horizon, today’s ISVs continue to focus on improving electronic
software sales and license distribution. In particular, the advent of site licenses, “click-wrap” licenses, and
improved metering tools are driving acceptance of electronic licensing and its various iterations. Electronic
licenses can be distributed as either electronic facsimiles of paper license "bundles" or as electronic licensing
tools integrated with the software application. Electronic licensing is already impacting the licensing
environment, as well as the purchasing and usage behavior of potential software service customers. Software
customers and end-users are able to select, on the fly, from a wide array of modules, rights management tools,
pricing and licensing models, and billing practices.
There are several industry case studies of xSPs and ISVs successfully deploying new services, electronic
distribution and electronic licensing tools. On the xSP side, USinternetworking Inc., for example, is an "Internet
managed application provider" that implements, operates, and supports packaged software applications that can
be accessed and used over the Internet. The company provides software from a slew of major vendors,
including Ariba, Broadvision, Lawson, Microsoft, PeopleSoft, Sagent, and Siebel. Among ISVs, Oracle Corp.
has set an aggressive goal of delivering most of its software electronically. To do this, the company has
streamlined its licensing terms and conditions and made both software and supporting licenses available through
the Oracle Store, leaving its sales staff free from haggling over contract terms and conditions and able to
concentrate on fewer, more lucrative named accounts. Microsoft has investments in several xSPs -- including
Digex and Corio -- and continues to roll out its strategy of providing rental licensing models across all its
products.
There are many advantages (to both vendor and customer) in electronic licensing solutions:
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Flexible licensing models: The software vendor is able to offer and manage network-licensing policies such
as concurrent, named-user, product suites and pay-per-use licenses that readily permit broad user access to
a product at a site or company, while fairly compensating the software vendor.
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-
Adaptable to Customer Requirements: The same software may be licensed in several ways at a given
customer site. For example, frequent users may have personal licenses, while infrequent users share
concurrent licenses so the customer can purchase at the lowest cost per user while also making the software
widely available.
-
Control Over Rights and Usage: The vendor may chose to either block the user from running software
when such use would exceed the license rights, or let the customer run but record usage information if the
software is used beyond what was licensed, and provide this information to customer management or
billing systems. This allows the vendor to limit use to licensed customers, or to use the service provider
model, pay-per-use or post-use payment models to bill customers for usage after the fact.
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Can Version to Meet Differing Needs: A single set of binaries may be used for a “standard”, “lite” or
“professional” version of a product, as the electronic license controls which level of functionality is
provided to an end user. This allows vendors to sell at several price points as well as different levels of
product sophistication.
-
"On the Fly" License Adjustment: Customers have dynamic control over which users on their network can
use the software, allowing for easy management control of existing and needed licenses.
Although electronic licensing may seem ideally suited for the distribution of software services, there are still
some challenges and pitfalls facing vendors:
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Design Issues: If one of the significant advantages of electronic license distribution involves licensing
specific components of a particular piece of software, the disadvantage is that many business software
applications are not yet modularly designed or available. Although suites of business applications such as
Microsoft's Office suite may be ideally suited to such distribution, many other potential enterprise
applications such as accounting software and supply chain management packages may not yet be available
in components.
-
Customer Perceptions: The support of customers and end-user organizations will be critical to widespread
adoption of electronic license solutions. However, many customers today still perceive electronic license
distribution as a vendor's desire to enforce license compliance, rather than a means to reduce the cost of
software acquisition for the customer or enterprise. Without a change in customer perception, electronic
licensing will continue to face critical challenges to implementation.
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Security: Electronic licensing is not the most effective software security solution for vendors concerned
about software piracy. Although electronic licensing will assist software publishers and vendors in
regulating and monitoring license enforcement, there is no substitute for a hardware-based software
protection solution for high-end niche market business applications.
Dynamics of Software Service Negotiations and Transactions
All parties that enter into agreements are subject to market and competitive forces, to existing laws and
regulations and to the forces of money and personality at play in business transactions. Forces that play a role in
negotiations for application services are discussed below.
Relative Size of the Parties
The early entrants in the application services market -- on both the supply and demand sides -- have been very
large and small entities. Large corporate customers are purchasing applications to support non-mission critical
functions or to relieve some pressure on an overburdened in-house IT operation. Other early customers include
small "dot.com" operations purchasing services in order to ramp up rapidly.
The dynamics in transactions where parties differ significantly in terms of financial and technical resources will
almost always favor the larger entity. In fact, the smaller entity may not enjoy the option of negotiating terms on
the price, license provisions or service levels and may be forced to accept the larger parties pro forma license
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terms. There are risks in blanket acceptance of unfavorable licenses. Many small xSPs are finding they may
have agreed to pricing and license terms, service levels agreements, and penalties that disproportionately favor
the customer. Given enough big, demanding customers unwilling to pay for the levels of service they receive, a
xSP may end up with an unprofitable business model and a quick trip to bankruptcy court.
Size of the Transaction
It is a truism that the larger the amount of money involved in a transaction, the greater the likelihood that there
will be protracted negotiations. However, the software service license, and the accompanying pricing models,
may challenge that conventional wisdom. As software services are more likely to be rented for short periods (1,
2, or 3 years) with monthly fees based on the number of users or metrics such as incremental CPU usage, the
sums involved at the initial license sale of services are much smaller than in a conventional license sale. Also,
services can be more easily upgraded, amended or canceled, again reducing the risks inherent in a service deal.
Hence, the customer is exposed to significantly lower levels of risk and may be more willing to sign contracts
without the extensive due diligence and negotiation that characterized prior generations of software sales.
"Packaged" Services vs. Customized Transactions
In the software service transaction, an increasing number of services are being "packaged" and sold under a
"click-wrap" agreement that is, by definition, not negotiated. Where the product must be customized to any
extent, there is no possibility of packaging and negotiations are more likely to take place. Software services,
particularly those that can be immediately purchased via the web, are ideally suited for packaging. Software
service providers are moving towards more packaged offerings by making available full suites of e-business,
productivity, and customer relationship management (CRM) applications.
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The SIIA Guide to Licensing Software as a Service
Overview of the License
Our discussions and research into licensing in the software as a service marketplace revealed that there are
many choices that can be made in the type, content, order and format of licensing provisions (hereafter referred
to interchangeably as provisions, clauses, articles) that can comprise the license agreement (or contract). As
they often comprise the key points of negotiation between the parties to an agreement, the following provisions
will be discussed in detail in our guide:
1. Preamble and Identification of the Parties ...................................................................................................................... 9
2. Recitals .................................................................................................................................................................................. 9
3. Interpretation of the Agreement...................................................................................................................................... 10
A. Definitions.................................................................................................................................................... 10
4. The Agreement .................................................................................................................................................................. 11
A. Rights Granted under the License............................................................................................................ 11
B. Scope of Services, Deliverables & Project Management..................................................................... 14
5. Underlying Rights, Ownership of Intellectual Property ............................................................................................. 16
A. Confidential Information and Proprietary Rights.................................................................................. 16
B. Trademarks and Marketing........................................................................................................................ 17
6. Fees and Terms of Payment............................................................................................................................................. 18
A. License Fees................................................................................................................................................. 19
B. Installation Fees ........................................................................................................................................... 20
C. Maintenance Fees........................................................................................................................................ 20
D. Training Fees ............................................................................................................................................... 20
7. Term, Default and Termination ..................................................................................................................................... 20
A. Term .............................................................................................................................................................. 20
B. Default ........................................................................................................................................................... 21
C. Effects of Termination................................................................................................................................ 22
8. Liability............................................................................................................................................................................... 22
9. Warranties and Indemnities ............................................................................................................................................. 23
A. Warranties .................................................................................................................................................... 23
B. Indemnities ................................................................................................................................................... 25
10. Choice of Applicable or Governing Law.................................................................................................................... 25
11. Assignment....................................................................................................................................................................... 26
12. Amendments and Modifications................................................................................................................................... 27
13. Force Majeure .................................................................................................................................................................. 27
14. Dispute Resolution.......................................................................................................................................................... 27
A. Litigation ...................................................................................................................................................... 28
B. Arbitration .................................................................................................................................................... 28
C. Mediation...................................................................................................................................................... 28
15. Notices .............................................................................................................................................................................. 29
16. Relationship of the Parties ............................................................................................................................................. 29
17. Entire Agreement ............................................................................................................................................................ 30
18. Severability....................................................................................................................................................................... 30
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Analytical Framework
Each provision will be analyzed within the following framework:
1.
2.
3.
Definition: What does this provision mean and what does it accomplish?
Comparison: In each case, how will the provisions in a contract for Internet-based or hosted application
services differ (if it differs at all) from a comparable provision in a conventional software license?
Example: Sample language for possible use in such a provision.
1. Preamble and Identification of the Parties
The preamble or identification of the parties should simply state the legal names of all parties to the transaction.
These articles should also contain the official business addresses of the parties.
Identifying the relevant parties may seem like a straightforward undertaking. But in an agreement for the
delivery of software services, there may be added complexity in the identification provisions. Software services
may be delivered through assorted combinations of ISVs, xSPs, infrastructure providers and/or systems
integrators.
Not every third-party relationship need be addressed in the preamble and identification articles. However, if a
vendor (licensor) has acquired key rights from a third-party IP owner, or plans to deliver a majority of its
services via an infrastructure provider partner, this should be reflected in the identification.
Parties that should be included in the identification provision:
-
Vendor/Licensor
Customer/Licensee
Any third-party maintaining proprietary rights
Sample Preamble/Identification Provisions:
i.
This software licensing agreement is made this _______day of ______, 20__, between
________________ (name, address and role i.e., licensor, vendor) and _________________
concerning the software product described in Exhibit A hereto, including all versions thereof for any
computers, devices, or equipment the program documentation therefor, and documentation for use
thereof in conjunction with any computers, devices or equipment for which designed.
ii.
This ______________ Software Distribution Agreement ("Agreement") is made and entered into on ,
______________, 20__ (the "Effective Date") between ______________, Inc. ("______________")
with offices at _____________________ (or ______________ Limited, with offices at
_________________) and ("______________") with offices at _________________.
iii.
__________, Inc. ("___"), a Delaware corporation with its principal office located at _________,
_________, and _______________________( "Client"), a Delaware corporation with its principal
office located at ____________________hereby agree that the following terms and conditions will
apply to each _________provided under this ________Agreement ("Agreement").
2. Recitals
Following the preamble, or identification of the parties, a set of paragraphs called recitals will usually appear.
In the United States, they often begin with "Whereas." However, the trend toward the use of plain English has
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led many drafters to delete this archaic word and simply use a heading called 'Recitals' or an introductory
statement such as: "This contract is made with reference to the following facts."
The recitals give a brief overview of what the parties intend to achieve by the creation of the contract. Strictly
speaking, it is not really part of the contract. The role of the recital is to form a brief record of the parties
objectives and the factual context in which the contract was originally written for use if, at some date in the
future, the contract comes to be interpreted when disputed.
Apart from language identifying the exact nature of the services to be provided, there will be no substantive
differences between recitals contained in conventional software licenses and those contained in a services
license.
Sample Recital Provisions:
i.
ii.
This Agreement provides for ______________ to _______________ on a schedule ("Schedule") attached
to this Agreement as Schedule __ or subsequently exe cuted by both parties referencing this Agreement.
___________ is in the business of development, sale, licensing and distribution of computer
___________ including the sale and distribution of third party products in combination with
___________ manufactured products.
___________ desires the right, on its own behalf and on behalf of its subsidiaries, to copy and/or
distribute proprietary software products owned by Developer to authorized ___________ resellers and
end users in combination with ___________ and/or third party computer products.
___________ desires to grant ___________ and its subsidiaries the non-exclusive right to copy and/or
distribution of Developer's proprietary software products, and for the exhibits to this Agreement to
define the terms and conditions specific to each respective product of Developer. Now therefore,
___________ and ___________ hereby agree as follows:
3. Interpretation of the Agreement
A. Definitions
Definitions are among the most critical elements of a license agreement and thus require the use of precise
wording. In a license agreement, a word is usually chosen as shorthand to signify and explain a more complex
concept. Often readers skim over the interpretation clause, but it is important not to overlook these clauses. A
subtle change in the meaning for a definition can have a significant impact throughout the contract. The
definitions may also provide a likely place to slip any unpleasant surprises into a contract.
Absent definitions, mediators or courts seeking to interpret an agreement will be forced to identify the intent of
the parties, the course of the dealings between the parties and other unpredictable elements of the agreement.
In the software service transaction, there are many potential additions to definitions contained in conventional
software licenses. Where a shrink-wrap license may have contained perhaps ten terms (usually including
definitions for software, documentation, acceptance, installation and a few other common concepts), the array
of definitions to consider in a service agreement has significantly expanded.
The parties to an application services agreement may need to define many of the following terms:
i.
ii.
iii.
iv.
v.
Acceptable Use
Acceptance
Addenda
Affiliates
Agreement
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vi.
vii.
viii.
ix.
x.
xi.
xii.
xiii.
xiv.
xv.
xvi.
xvii.
xviii.
xix.
xx.
xxi.
xxii.
xxiii.
xxiv.
xxv.
xxvi.
xxvii.
xxviii.
xxix.
xxx.
xxxi.
xxxii.
Application
Commercial use
Concurrent Users (or the applicable basis for measuring usage such as Named User, Site License)
Consulting and Implementation Services
Content
Customized
Demonstration Copy
Development Software
Dis tributor
Documentation
End User
Evaluation Copy
Hardware
Installation
Machine
Non-Commercial Use
Operating Environment
Representative
Revenues
Seat
Server
Service Level Agreement
Session
Software Application
Third Party
Updates
Upgrade
4. The Agreement
The agreement, or rights granted under license, is the heart of the license. For our purposes, we will discuss the
agreement in terms of the rights granted and not granted, as well as the scope of services to be provided in a
software services agreement.
A. Rights Granted under the License
The key components of any agreement are the rights granted to the licensee, and the rights not granted the
licensee. The clauses under this header determine what customers or third parties are allowed to do with the
licensed service. These provisions also set out restrictions on use.
Each party must list here every activity they wish to undertake, or that they wish their users to undertake, with
the service. Matters not mentioned will not be allowed, unless a further license amendment or modification
resets the terms. The list of activities can be as long or as short as preferences, or pocketbooks, can afford. Be
aware that parties should not negotiate over the statutory rights that are already granted by national copyright
law or international treaties.
In an application service end user license, substantive differences in the rights granted and not granted the
licensee may exist:
-
Many end user license agreements for the use of shrink-wrap software limit the licensor's right to install to
a single PC, a single network, or a site. Software services are most often licensed on the basis of multiple
concurrent users, machines and/or sites.
-
As application service delivery may be initiated by logging on to a server or a web site, without the
installation of sizeable client software, the potential for unauthorized use exists. In addition to security risk,
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the employment of a pricing model based on concurrent use or Machine IDs may warrant the inclusion of
measurement and reporting methods in the license. For these reasons, authentication mechanisms and
other access controls have become critical to ISVs and xSPs in preventing unauthorized use.
-
As application services launch and run from a secure server, copying activity at the end user level is likely
to be curtailed.
-
A great part of the allure of application services resides in the lower overhead offered by a "one size fits
all" application that requires little or no modification. Furthermore, the application may not reside at the
end user desktop, so the opportunity to modify an application may be mitigated.
As opposed to the substantive differences in end user licenses, distribution agreements between as ISV and xSP
may grant rights, and contain restrictions, very similar to a conventional software license. In almost all
distribution scenarios, service providers will take physical possession of the software, will need to make copies
of the application, and will need to customize it to their customer requirements.
Some of the most important rights granted under a license agreement include:
i.
Exclusivity
Exclusivity provisions govern the licensor's right to sell the product to more than one licensee. Typically,
pre-existing, non-customized software is sold on a non-exclusive basis.
Sample Exclusivity Provisions:
(a) During the Term and subject to the terms, conditions and fees set forth in this Agreement, ________
grants __________the following non-exclusive, non-transferable (except as set forth herein) licenses in
the Territory:
(b) Non-exclusivity. Nothing in this Agreement shall prevent either party from entering into a similar
agreement with any other party. This Agreement shall not be construed to restrict either party from
engaging in any activities with respect to the other party's competitors' products or services.
ii.
Right to Install and Use
Right to use clauses detail the licensee's right to install and use the software. For example, such provisions
can set a limit on the number of machines on which the software can be installed. Parties must consider the
following issues in drafting installation and use provisions:
-
Scope of Installation and Use Rights
Network Use
Remote Use
Sample Software Installation and Use Provisions:
(a) The Software may be used only by ____________'s employees, only for the Authorized Use, only at
the Designated Site and only on the platform for which ____________ subscribed during the online
order process and for which ____________ has paid the applicable License Fee. ____________ may
only use the Software for its internal business use and not in the operation of a service bureau, time
sharing or outsourcing service or for the benefit of any other person or entity.
(b) ____________ grants ____________ the right to use Software on the Machine(s) and by the number of
Seats or Concurrent Users for which __________ has paid the applicable license fees, solely in
connection with ____________'s development, marketing and support of the Application in
accordance with the terms of this Agreement.
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iii. Right to Copy
This provision grants the right, if any, of the distributor or user to copy the software.
Sample Right to Copy Language:
(a) ____________ may only make one copy of the Software as necessary for bona fide backup or archival
purposes.
(b) _____________ grants __________ the right to operate Software on back-up equipment at the same
site as the originally designated Machine(s) in the event, and for as long as, such Machine(s) are
inoperative and to make a reasonable number of copies of the Development Software solely for
inactive back-up and archival purposes.
iv. Right to Modify
With the exception of certain open source software licenses, only the owner of the copyright in a software
application has the right to create or authorize others to create a derivative work.
Sample Modification Language:
(a) No identifying marks, copyright or proprietary rights notices may be deleted from any copies of the
Software made by ____________. ____________ shall not rent, transfer, distribute, modify or
translate the Software or decompile, create or attempt to create, by reverse engineering or otherwise,
the source code from the object code of the Software, or adapt the Software, or any portion thereof, in
any way or use it to create a derivative work.
v.
Right to Distribute, Market, or Resell
In a distribution, publishing, reselling or aggregator agreement, what is the scope of the licensee's right to
market the software to others? The licensor may grant, limit or prohibit the rights to sub-license, re-sell, or
rent software.
Sample Distribution Language:
Subject to the terms and conditions of this Agreement, _______ hereby appoints Distributor as a
distributor of the Licensed Software and grants to Distributor the following non-transferable rights, all of
which may be exercised only by Distributor in the Territory and during the License Term. This
appointment shall be on a non-exclusive basis. These rights may not be sublicensed except as expressly
permitted in this Section __.
(a) To reproduce, exactly as provided by _________, object code copies of the Licensed Software and
Ancillary Programs or portions thereof solely to exercise the rights granted in this Section __;
(b) To distribute and sublicense to Customers the right to use the Licensed Software and Ancillary
Programs or portions thereof on a limited term basis in accordance with the terms of the End User
License Agreement, subject to the restrictions in Section __;
(c) To use the Licensed Software and Ancillary Programs for the sole purposes of operating the Licensed
Software on Distributor's computer hardware and operating system(s) to (i) test and evaluate the
Licensed Software, (ii) train Distributor's personnel in the marketing and sales of the Licensed
Software, (iii) demonstrate and promote the Licensed Software to potential Customers, and (v)
provide First-Line Support and Second-Line Support to Customers by using the License Software in a
test environment to (1) diagnose reported problems or performance deficiencies of the Licensed
Software, and (2) resolve such problems or deficiencies. Notwithstanding the foregoing, Distributor
may (i) not use the Licensed Software internally in a production capacity to run any of its business
operations including the sales and customer service activities associated with its End User Customers,
or (ii) use the _________ Tools Programs set forth in EXHIBIT __ solely in accordance with the
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Documentation for the limited purpose of configuring the Licensed Software for distribution with the
Value Added Offering and not for general application development purposes,
(d) To copy the Licensed Software for archival or backup purposes, and to make a sufficient number of
copies for the use by Distributor as permitted in this Section __, provided that all titles and trademark,
copyright, and restricted rights notices are reproduced on all such copies;
(e) To distribute to Customers, exactly as provided by _________, any Documentation, Training Materials
and Marketing Materials provided by _________, subject to the payment of fees set forth in Section
__. Distributor shall not reproduce the Documentation, Training Materials, or Marketing Materials for
any purpose.
License Restrictions
From the licensor's perspective, some of the most important rights are those withheld from the customer.
Software licenses can be used to restrict any and all of the activities mentioned in the rights granted examples
above. Also, restrictions can be applied to activities such as distribution in certain geographic areas, or to
restrict the software to certain types of media (e.g. web sites, CD-R).
Sample Blanket Restrictions:
i.
Distributor acknowledges that, except as explicitly stated in this Agreement, the Agreement does not
grant Distributor any right or license to the Licensed Software or Ancillary Programs or any
proprietary rights therein, and no license or other rights shall be created by implication or estoppel. In
particular, but without limiting the generality of the foregoing, no right or license in or to source code
for the Licensed Software or Ancillary Programs is granted hereunder. Distributor covenants that it
shall not prepare, and it shall not permit any others under Distributor's control to prepare, any
derivative works of the Licensed Software or Ancillary Programs, or otherwise modify or revise any
materials received from _________. Distributor covenants that it shall not use, reproduce, distribute or
sell the Licensed Software or Ancillary Programs in any manner or for any purpose except as
specifically permitted under this Agreement.
B. Scope of Services, Deliverables & Project Management
The agreement must also identify what is being (and not being) bought or provided. The terms of the agreement
must be phrased in a clear and unequivocal fashion. If matters are phrased in terms of desires or wishes the
agreement may not be binding. Anything omitted from the scope of services may not be provided and parties
will have to return to the table at a later date.
Due to the distributed nature of application service delivery via the Internet or other public TCP/IP network, the
provisions addressing the scope of services (and service levels) have increased in importance. Currently, most
software service agreements are executed with very specific product and service specifications, as well as
performance metrics, contained in the license or attached in Service Level Agreements (SLAs). If such
performance terms and metrics are not contained in the main body of the license agreement, parties should
consider adding Scope of Service and Product Schedule provisions to the license.
Sample Scope of Services Provisions:
i.
Scope of Services. _______ will provide the services as defined in individual Product Schedules which
will be mutually agreed upon, attached hereto and incorporated herein as Exhibit __. The Product
Schedules may be modified by mutual written agreement. Changes or additions to work performed
under each Product Schedule may require changes in the resources provided by __________ and may
result in additional costs or charges in each Product Schedule.
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Product Schedule. Each Product Schedule will become a part of this Agreement, and, unless otherwise
clearly specified in writing, the terms and conditions of each Product Schedule shall be independent of
and shall have no impact upon, the provisions of any other Product Schedule.
Client may order additional ________or add on to existing ________by contacting ________.
_________ will send Client a Product Schedule, based on ________ formal requirements analysis
and/or proposal for the additional services, specifying the terms of the _________, including the
payment(s) due for each ordered item. Client may accept the terms of the _________by signing that
Product Schedule and returning it to ________. All executed Product Schedules will become part of
this Agreement and will be covered by all of this Agreement's terms and conditions.
Specific performance metrics are typically addressed in appendices or schedules attached to the agreement.
Common metrics used in hosted application agreements include:
i.
Performance and Connectivity
What types of hardware and software are available, what are the expected levels of uptime, available
bandwidth, etc?
ii.
Points of Responsibility
At what point, or points in the network, does the service provider assume responsibility?
iii.
Integration, Customization and Compatibility
To what extent is the service provider responsible for integrating its systems with the customer's
systems or ensuring compatibility of systems? Is any application or data conversion necessary?
iv.
Training and Education
Assuming training is required as part of the deal, a comprehensive training plan should be added as an
appendix to the agreement. Key issues to consider in creating the training plan are:
Cost
Number of employees to be trained
How many instructors will be provided
Can the customer designate instructors?
Can the customer review and approve training materials?
Where will the training occur?
v.
Scalability
What are the procedures, and time frames, for adding new users?
vi.
Version and Technology Changes
What is the service provider's responsibility for knowing of, implementing and maintaining new
technologies, including new releases, updates and upgrades?
vii.
New Application(s)
Under what terms will the licensor provide new applications, which replace or complement service
provided to the licensee? Will licenses be transferable or will re-negotiation be necessary?
viii.
Discontinuation of Application(s)
If the application is eliminated from the product line, or sold to another vendor, how does the licensor
plan to provide ongoing maintenance and support the installed base?
ix.
Support
What support services are to be offered? Specify the types of support (e.g., help desk, problem
resolution, training) when such support will be available (normal business hours, 24/7) and how such
support will be provided (an online help desk, onsite). The contract should outline standard problemescalation procedures for handling service issues.
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x.
Disaster Protection/Back-Up/Re-Route
What resources and procedures exist to ensure continuous operation of the service in the event of
system failures or other disasters?
5. Underlying Rights, Ownership of Intellectual Property
Due to the different layers of protection in intellectual property, licensors must ensure that they own the rights
they purport to license. In fact, a prudent licensee should obtain proof from the licensor in the form of written
releases from the owners of underlying rights.
Software developers crafting dis tribution agreements with xSPs should carefully protect intellectual property
such as trade secrets, proprietary information, trademarks and tradenames, and key patented technology such as
application program interfaces (APIs) and source code.
In the delivery of software service to the end user, there may be less exposure of critical intellectual property,
such as source code, but there are still core brands, technologies and interface designs that require protection
under a license agreement.
A. Confidential Information and Proprietary Rights
Vendors executing licenses seek to minimize potential exposure of intellectual property such as trade secrets
and design specifications. Within the software license, confidentiality can be mandated by confidentiality and
nondisclosure provisions. The following are key components of such provisions:
-
Acknowledgements of obligations on the user's part - the licensee acknowledges that the vendor owns all
proprietary rights, including trade secrets, in the software and documentation.
-
Restrictions on the use of software - customer prohibited from selling or otherwise transferring the trade
secrets or any materials containing the trade secrets. The customer is prohibited from using the software
and the proprietary information except as authorized by agreement.
-
Protective measures to be implemented by the licensee - Licensee affirmatively obligates itself to protect
the licensor's trade secrets and proprietary rights, as well as to take action against parties who violate
nondisclosure agreements.
-
Confidentiality and proprietary rights notices
Sample Language for Confidential Information and Proprietary Rights Clauses:
i.
All programs and documentation, including, without limiting the generality of the foregoing,
algorithms, code, whether in source or object code, procedures and documentation (the "Proprietary
Information") developed by _________ pursuant to this Agreement shall remain the exclusive property
of _________. All applicable rights patents, copyrights, trade secrets, and other proprietary rights in
the Proprietary Information are and remain in the control of __________. Licensee shall not sell,
transfer, publish, disclose, display or otherwise make available proprietary information.
ii.
______________ (or its licensors) retains ownership of all intellectual property rights (including,
without limitation, patents, copyrights, trade secrets and trademarks) in and relating to the Programs
and all enhancements, modifications and Updates thereof. Except for the licenses specifically granted
in this Agreement, no other express or implied licenses are granted by ______________ with respect to
the Programs.
The Programs and other proprietary information provided by ______________ hereunder contain and
constitute trade secrets, information and data proprietary to and copyrighted by ______________.
______________ shall use a reasonable degree of care to protect the confidentiality of the Programs
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and shall not cause or permit such confidential information or data to be disclosed to third parties or
duplicated except as permitted in this Agreement. ______________ acknowledges and agrees that
unauthorized disclosure, use or copying of the Programs may cause ______________ irreparable
injury. Accordingly, in the event of any unauthorized disclosure, use or copying of the Programs,
______________ agrees that ______________ shall have the right to seek injunctive or other equitable
relief.
iii.
_________ and its suppliers shall retain all title, copyright and other proprietary rights in and to the
Licensed Software. Distributor does not acquire any rights, express or implied, in the Licensed
Software, other than those specified in this Agreement. In the event that Distributor makes suggestions
to _________ regarding new features, functionality or performance that _________ adopts for the
Licensed Software, such new features, functionality or performance shall become the sole and
exclusive property of _________, free from any restriction imposed upon _________ by the provisions
of Section __.
Another approach frequently employed by vendors to protect the confidentiality of secrets embodied in their
software is to specifically prohibit activities designed to discover those secrets, such as reverse engineering, decompilation or disassembly of the software source code or interface information.
Sample De-compilation Provision
i.
Distributor acknowledges that the Licensed Software and Ancillary Programs contain the valuable
information of ______ and its licensors, and Distributor agrees not to cause or permit the modification,
reverse engineering, translation, disassembly, or de-compilation of, or otherwise to attempt to derive
the source code of the Licensed Software or Ancillary Programs, whether in whole or in part. If
required under applicable law, upon Customer's request, _______ shall provide information necessary
for Customer to achieve interoperability between the Licensed Software and other software for a
nominal administrative charge.
B. Trademarks and Marketing
Trademarks are among a company's most valuable assets and serve as important devices for branding and
marketing software services. The value of trademarks and the associated goodwill increases over time given
increasing advertising, promotion and sales. Hence, protection of trademarks should be of paramount interest
when executing a license.
Marks that can be protected in a software license include:
-
Trademarks
Service Marks
Trade Names
Sample Trademark, Service Mark and Trade Names Provisions:
i.
_______ may use the trademarks, service marks, logos and trade names that relate to the Programs or
_____________________(the "Marks") solely in connection with this Agreement; provided that
__________ clearly identifies ___________ownership of such Marks. The Marks remain the exclusive
property of ___________ and ___________ agrees not to register the Marks or take any action that
jeopardizes ___________ proprietary rights in the Marks. _____________ shall only use the Marks in
unaltered form and agrees to cooperate with ___________instructions and quality procedures
concerning their use. ____________ reserves the right to require ________ to discontinue use of the
Marks or any advertising or marketing materials relating to _________ or the Programs. _________
may identify ________ as a___________ in appropriate ______________ advertising and marketing
materials.
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ii.
In connection with ____________'s marketing and distribution of _____________, Developer grants
to ____________, ____________'s Subcontractors and ____________'s Resellers the non-exclusive,
non transferable right during the term of ____________'s rights of distribution under this Agreement
to use (1) all copyrighted materials contained in the Program(s) (including but not limited to screen
shots from the Program(s)), the Documentation, and any packaging or other materials provided
by Developer and (2) all trademarks associated with the Program(s).
iii.
Supplier grants to _________ a non-exclusive, non-transferable, worldwide, royalty-free right to use
and reproduce certain of Supplier's logos, trademarks and servicemarks in connection with the
distribution and promotion of the ________Products. ________agrees to use such logos, trademarks
and service marks in a manner approved by Supplier and consistent with Schedule __, attached hereto
and incorporated herein.
Sample Trademark Use Restriction Provision
i.
Trademarks and Logos. This Agreement does not authorize Licensee to use any ________ name,
trademark or logo. Licensee acknowledges that _______ owns the ________ trademark and all
________-related trademarks, logos and icons including ____________("_______ Marks") and agrees
to: (i) comply with the _________ Trademark Guidelines; (ii) not do anything harmful to or
inconsistent with _________'s rights in the _______ Marks; and (iii) assist _________ in protecting
those rights, including assigning to ________any rights acquired by _________ in any ________
Mark.
Today's ISVs and xSPs are entering into more numerous, and increasingly complex, arrangements to market
and promote their software. The use of trademarks and service marks in tools such as joint marketing
agreements and press releases should be addressed in a license agreement.
Sample Joint Marketing Provision:
i.
The Software shall be marketed on a joint logo basis in the trade dress of __________, or its
sublicensees, with a byline identifying Supplier. __________Documentation shall contain the
following notice after the title of the Program: _________ (TM), a trademark of ________, Inc.;
Copyright (C) 20__ __________, Inc., edited and distributed by ____________under license. All
rights reserved"
Sample Press Release Provision:
i.
The parties agree that, subject to Customer's reasonable interpretation of its securities law requirements
and subject to the parties agreeing that a press release is useful to disclose noteworthy information, the
parties will jointly issue a mutually agreed upon press release announcing the relationship between the
parties reflective of this Amendment at a time reasonably acceptable to both parties.
6. Fees and Terms of Payment
After the value of the software service has been agreed upon, the parties will need to negotiate the structure of
payment for use of the service. The types of fees or charges used in a software contract vary greatly, depending
on the type of contract and the business practices of the vendor and customer.
In the case of a conventional software end-user license agreement, license fees were typically one-time fixed
fees. Often, variable maintenance and support fees were incurred throughout the life of the agreement.
License fees that recur throughout the contract are a fundamental difference between conventional software and
application service licensing. Application service fees are characterized by:
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-
Small up-front costs with service offerings, including one-time setup charges (such as data migration,
training, customization, or integration services).
Fees are charged on a monthly basis, at a fixed amount (based on user, desktop, modules, servers, or
transactions) or, long term, on a metered basis (resource based, hourly).
License fees and models are discussed in more depth in the recent SIIA white paper "Software as a Service: A
to Z for ISVs." For the purposes of this paper, we will address the definitions of various fee types without
entering into discussion of the merits of different licensing schemes.
Finally, the payment schedule, as well as metering and auditing requirements for the use of the service can be
entered in the payment and terms of payment articles or in a schedule attached to the agreement.
A. License Fees
There are currently a number of pricing/licensing models that are being used/tested in the application hosting
market today.
i.
Usage Model
The foundation of the usage model is that an end-user will pay only for resources that are used. There
are many resources that are utilized while using an application-hosted product. Some of the major
resources that can be measured (and charged for) include:
-
End-user logged time on the application
CPU cycle time
Application server storage
Data base server storage
Bandwidth used
ii.
Named User Model
The named user model is based on charging any authorized user a regular fee to access the applicationwhether they use the application in a given time period or not. The current industry trend is to charge
per month, although there are xSPs that charge on a daily or weekly basis for short-term projects.
iii.
Machine ID Model
The machine ID Model is similar to the named user model except that instead of the software being
available to a single user on many machines, it is available to many users on a single machine.
iv.
Concurrent User Model
The Concurrent User Model is based on allowing a certain number of users to have simultaneous
access to the application. There can be a much larger number of “authorized” users than can access the
application at the same time. If more authorized users wish the access the application simultaneously
than there are concurrent connections, they are denied access.
v.
(End-user) Site License
This model simply charges a regular fee for unlimited access for any employee of the company that is
the customer. The prevailing industry standard is to charge a monthly fee to the company over a one,
two, or three-year contract.
vi.
Combinations
Many xSPs have developed flexible pricing that is a combination of the models described above. For
example, a pricing structure could include a fixed monthly fee (site license), small named user monthly
fee, and (larger) concurrent user monthly fee.
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Sample License Fee and Payment Term Provisions:
i.
Fees
As compensation for the license of the ________ granted to Client and the provisions of services as
applicable, Client agrees to pay the amount(s) specified in each executed Product Schedule. Any fee
specified in a Product Schedule will only remain in effect until the date specified in the Product
Schedule.
ii.
Payment Terms
Unless otherwise specified in the Product Schedule, payments will be due and payable to ______
within forty-five (45) days of the date of ________'s invoice. Such invoices will be generated in
accordance with the terms specified in each Product Schedule. _________ reserves the right, in
_________'s absolute discretion, to perform a credit check on Client.
B. Installation Fees
Installation fees are one-time, up front payments made for loading software on client machines and
commencing service.
C. Maintenance Fees
More often referred to as "Upgrade" and "Service" or "Support" fees. This item often includes both the service
contract for maintaining and supporting the application as well as the arrangements for providing technical
support to IS staff and end users. Articles or addenda should specify the levels of application maintenance and
support to be provided by the licensor.
D. Training Fees
Most organizations purchase formal training for either users and/or IS staff at the time of installation. This
training often has little or no costs to the customer because it is provided by the reseller or ISV as part of the
initial purchase. For those organizations that choose to purchase ongoing training, the license agreement should
contain a schedule and price framework for the term on the initial agreement.
7. Term, Default and Termination
Agreements can be made for different periods of time and the term provisions govern the length of a license
agreement. Most licenses also lay out the options for default, extension and/or renewal and the effects of
termination.
A. Term
If there is no specific provision concerning the commencement of the license, then the agreement will
commence from the date upon which it is signed. It is standard to include a provision, which deals with
commencement, in order to avoid misunderstanding. Where there is a starting date other than the date of
signature there is no reason why this cannot be before the date of signature if the parties so wish.
Licenses can be as long or as short as the parties decide and can always be renewed. In the interest of precision,
state the date of termination explicitly rather than the length of the term. It is also possible to have a license
which will carry on for on indefinite period and can be brought to an end by due notice.
With regard to a software service transaction, ISVs must be aware that software is not being leased and
transferred into the possession of the end user licensee, but rather being rented on a recurring, renewable
periodic basis. Therefore, the perpetual license option, which allowed for an up-front payment and an open and
unspecified period of use, is not going to be the preferred option for xSPs. xSPs renting applications to the
customer will try to obtain license terms from their ISV partners that mirror the terms they are offering to
customers.
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Preferred terms for xSPs will be:
-
Limited term with specified date
Renewal with evergreen clauses.
Sample Provisions for Defining Term:
i.
The initial term shall commence on the effective date and shall continue for a period of _ years,
thereafter unless sooner terminated as in hereafter provided (see part _ on Termination). After the
initial term, this agreement may be renewed on an annual basis if mutually agreed by both parties in
writing prior to the end of the term. "Term" shall mean the initial term together with any agreed
renewal periods.
This Agreement shall commence on the Effective Date, shall continue in full force and effect for a period of one
(1) year, and shall be automatically renewed thereafter for successive one (1) year periods unless notice of
intent not to renew is received by either party at least ninety (90) days prior to the commencement of any
subsequent term.
B. Default
A license should always contain terms that set out a mechanism or circumstances upon which the license must
terminate. Under the general law a contract may be terminated at any time by notice if the other parties defaults
by failing to perform any obligations on its part. This usually applies only if there has been a serious breach.
The agreement should set out the events that characterize default on the part of both the licensor and licensee.
Examples of events that could trigger default on the vendor side are insolvency, bankruptcy, and failure to
comply terms of the agreement. On the customer side, failure to make payments is the most common trigger of
default.
Sample Termination For Cause Provisions:
i.
If __________ fails to pay any sum of money past due and owing under this Agreement within __days
of written notice thereof from _______, ________ shall have the right to terminate this Agreement
without further notice to ________. If either party breaches any of the terms, conditions or provisions
of this Agreement, and fails to cure such breach within __ days after written notice thereof, the other
party shall have the right to terminate this Agreement without any further notice.
ii.
Either party will have the right to terminate this Agreement immediately upon written notice at
any time if:
-
The other party is in material breach of any term, condition or covenant of this Agreement
other than those contained in Section 8.1 and fails to cure that breach within thirty (30) days after
written notice of such breach;
-
The other party is in material breach of any term, condition or covenant of this Agreement
contained in section or provision __; or
-
The other party: (i) becomes insolvent; (ii) fails to pay its debts or perform its obligations in
the ordinary course or business as they mature; or (iii) makes an assignment for the benefit
of creditors.
Sample Termination Without Cause Provision:
i.
___________ shall have the right to terminate this Agreement at will, with or without cause, upon
thirty (30) days written notice.
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C. Effects of Termination
Contract negotiators should further evaluate the consequences of termination or expiration. For example, what
rights will the vendor grant the distributor or customer if there is a breach of contract? What types of assistance
will the service provider offer on termination or expiration?
A new set of questions arises in the case of the software service agreement. Will the customer have any
ongoing rights to use service provider-owned or licensed technology? Will the service provider incur any winddown costs that should be borne by the customer such as redeployment or termination of resources including
people, machines and software?
Sample Effects of Termination Provisions:
The license agreement may address the alternatives available to parties terminating agreements, with or without
cause.
i.
If this Agreement is terminated prior to the expiration of the term set forth herein either by Customer
for its convenience or by ________ for Customer's material breach of this Agreement, Customer will
be liable for and pay ________ any remaining balance of the revenue commitment set forth in section
__.
ii.
Termination of this Agreement for any reason shall not affect any past or future sums due _______
under this Agreement or any additional remedies provided by law or equity to either party. All rights
that have been granted to Client shall immediately be terminated and all unpaid charges accrued under
this Agreement shall become immediately due and payable upon the happening of any event of
termination. In the event of a termination of this Agreement or any Product Schedule for default, each
party agrees to return to the other within sixty (60) days of a request, any property, data sheets,
schematics, samples, customer lists, confidential information, in whatever form or media which are
used by a disclosing party or which are furnished to a recipient.
8. Liability
Notwithstanding the ISVs or xSPs best efforts, software may contain defects, which may at some time harm the
licensee or customer. Vendors should therefore consider establishing a limit on the scope of their liability to the
licensee for damages. Liability can be allocated among the licensor, licensee and any third parties. In addition
to identifying damages the service provider agrees to cover, liability provisions can be used to disclaim all
liability. Limiting liability and risk to discrete events and reasonable amounts in light of the value of the overall
transaction is crucial.
There are a number of ways to limit liability. In the typical software contract, they usually include the
following:
-
Maximum Dollar Limitation on Damages - Except in the case of personal injury, a vendor's liability for
damages suffered by a customer can be limited to a dollar amount specified in the contract, provided the
amount is not so low that the customer is left with no recourse in the event the vendor breaches the
contract.
-
Exclusion of Incidental and Consequential Damages - In addition to limiting the dollar amount of any
liability, vendors can also limit the types of damages for which they can be held accountable.
-
Reduced Statute of Limitations - Another way in which damaged may be limited is through the use of a
contractual provision reducing the period of tune during which the vendor is exposed to liability.
-
"No Liability"" Clauses - Some vendor will try to contractually eliminate all liability by including a clause
excluding liability for any cause whatsoever. However, as a general proposition, a vendor cannot make a
22
representation regarding a products capabilities and performance and at the same time claim immunity
from liability if it fails to perform.
Sample Liability Provisions:
i.
.
ii.
iii.
___________ and ____________'s licensors shall have no liability with respect to its obligations under
this agreement or otherwise for special, incidental, indirect, consequential, punitive or exemplary
damages, including damages for loss of business, loss of profits, business interruption, or loss of
information arising out of the use of or inability to use the software, even if or ____________'s
licensors have been advised of the possibility of such damages. In no event shall ____________ or
____________'s licensors be liable for any reason and upon any cause of action whatsoever relating to
any third party software or hardware. In no event shall ____________'s aggregate liability for any
reason(s) and upon any cause(s) of action whatsoever exceed the amount of license fees actually paid
by licensee to ____________ under this agreement
Except as provided in section __, under no circumstances shall licensor, or any affiliate be liable to
each other or another party for indirect, incidental, consequential, special or exemplary damages
arising from this agreement, even if that party has been advised of the possibility of such damages,
such as, but not limited to, loss of revenue or anticipated profits or lost business.
Except for claims involving personal injury or death, intentional misappropriation of the intellectual
property of a party by the other party or the loss of valuable intellectual property through the failure of
the other party to protect it as required hereunder, in no event shall either party or their affiliates or
licensees be entitled to any special, indirect, incidental, or consequential damages (including lost
profits) or damages exceeding the amounts theretofore paid to supplier under this agreement, whether
such liability arises from any claim based on breach or repudiation of contract, warranty, business tort,
negligence, or otherwise.
9. Warranties and Indemnities
A. Warranties
There are two types of warranties the parties to a software contract need to consider: express warranties and
warranties implied by law. Express warranties do not come into existence unless a licensor makes a statement
or representation of fact to the customer. Implied warranties, on the other hand, come into existence
automatically and become part of the contract unless they are expressly disclaimed.
For the vendor, the first issue is the most fundamental: what does the licensor expressly warrant that its software
will do? Although a vendor is under no obligation to make any warranties at all, if it decides to do so, the
agreement should clearly state what they are. Express warranties can cover almost any topic, but the important
ones relate to defects and the performance of the application. We find, again, that delivery of application
services via the Internet or public network, may make express warranties an inherently risky proposition for the
xSP.
The second issue for the vendor relates to warranties implied by law. These are the warranties of
merchantability and fitness for a particular purpose, which can automatically become part of the warranty unless
they are expressly excluded. It is normally advisable for a vendor to disclaim implied warranties, and most
software contracts do so. The rules for disclaiming implied warranties require the use of certain contract
language printed or typed in a "conspicuous manner." Hence, disclaimers are often typed in capital letters.
The third issue for vendors relates to limitations and restrictions on a vendor's warranties. That is, a vendor may
want to limit its warranties so it can quantify its exposures and plan accordingly. As noted above, almost any
statement made by a vendor can constitute an express warranty. If a vendor does not intend to be bound by
these statements, they should be expressly excluded in the contract.
23
For the licensee, they are entitled to request that licensors warrant that they can:
-
Enter into the license agreement (that they own the product/service and have cleared all necessary rights),
and,
-
That in doing so they will not infringe upon any intellectual property, privacy, publicity rights or include
libelous or pornographic images, etc.
-
Deliver specified standards of performance.
Sample Warrant of Title and/or Authority Provisions:
i.
Vendor warrants that is has full title and ownership of the Software. Vendor further guarantees that it
has the full power and authority to grant the license granted by this Agreement to the User and that the
license to use by the User of the Software will in no way constitute and infringement or violation of
any copyright, trade secret, trademark, patent or any other proprietary right of any third party.
ii.
________ warrants that it has the authority to license the Software Application(s) for the purposes set
forth in this Agreement and the Product Schedule. Client acknowledges and agrees that its sole and
exclusive remedies for breach of this warranty are set forth in Section __ of this Agreement.
Sample Performance Warranties:
i.
______________ warrants that the then current, unmodified version of the Programs provided by
______________ to ______________ will operate in all material respects in conformity to
______________’s published Documentation for a period of ninety (90) days from the date of initial
service to ______________. If the Programs do not perform as warranted, ______________’s sole
remedy, at ______________’s option, will be repair/replacement of the non-conforming Program or a
refund of the license fee paid by ______________ for such non-conforming Program.
______________ does not represent that the Programs are error-free or will satisfy all of
______________'s or its End User's requirements. This warranty is in lieu of all other warranties. To
the maximum extent permitted under applicable law, all other warranties, conditions and
representations, whether express, implied or verbal, statutory or otherwise, and whether arising under
this agreement or otherwise are hereby excluded, including, without limitation, the implied warranties
of merchantability, non-infringement and fitness for a particular purpose.
ii.
_________warrants that: (a) work performed to complete any Product Schedule will be performed by
qualified personnel in a professional, workmanlike manner, consistent with the prevailing standards of
the industry; and (b) it will use commercially reasonable efforts to complete each Product Schedule.
Sample Disclaimer of Warranty:
i.
____________ Provides the software to you ""as is"" and without warranty of any kind, express,
statutory, implied or otherwise, including without limitation any warranty of merchantability, fitness
for a particular purpose or non-infringement. No oral or written information or advice given to you by
any ________ employee, representative or distributor will create a warranty for the software, and you
may not rely on any such information or advice.
ii.
The warranties above are exclusive and in lieu of all other warranties and conditions, expressed,
implied or statutory, including, but not limited to, the warranties of merchantability and fitness for a
particular purpose, title or non-infringement.
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B. Indemnities
An indemnification provision in a contract is an agreement by one of the parties to reimburse the other(s) for
certain categories of losses or costs that it may incur. Indemnification clauses are primarily used for two
purposes in software contracts. In the first case, the customer is protected if the vendor has misappropriated the
software they are using. The second way is to protect one party against the actions of another in an ongoing
relationship. Essentially, each party is looking for protection from actions by the other over which it has no
control.
Sample Indemnification Provisions:
i.
______________ shall indemnify and hold ______________ harmless from and against all claims,
judgments, awards, costs, expenses, damages and liabilities (including reasonable attorneys' fees) of
any kind and nature that may be asserted, granted or imposed against ______________ directly or
indirectly arising from or in connection with: (i) any claims that any Application or other software
supplied by ______________ (other than the Programs provided by ______________) infringe any
third party intellectual property rights; (ii) any misrepresentation made by ______________ regarding
______________ or the Programs; (iii) any breach by ______________ of this Agreement, including
any failure to include the Mandatory Terms in any Sublicense Agreement; or (iv) any warranty,
representation or guarantee made by ______________ with respect to the Programs in addition to the
limited warranty specified in ____________of this Agreement.
ii.
Licensor, at its own expense, will indemnify, defend and hold harmless ____________, its Affiliates
and their employees, representatives, agents and affiliates, against any claim, suit, action, or other
proceeding brought against ____________ or an Affiliate based on or arising from a claim that the
Licensor Content as delivered to ____________ or any Licensor Brand Feature infringes in any
manner any Intellectual Property Right of any third party or contains any material or information that
is obscene, defamatory, libelous, slanderous, that violates any person's right of publicity, privacy or
personality, or has otherwise resulted in any tort, injury, damage or harm to any person; provided,
however, that in any such case: (x) ____________ provides Licensor with prompt notice of any such
claim; (y) ____________ permits Licensor to assume and control the defense of such action, with
counsel chosen by Licensor (who shall be reasonably acceptable to ____________); and (z) Licensor
does not enter into any settlement or compromise of any such claim without ____________'s prior
written consent, which consent shall not be unreasonably withheld. Licensor will pay any and all costs,
damages, and expenses, including, but not limited to, reasonable attorneys' fees and costs awarded
against or otherwise incurred by ____________ or an Affiliate in connection with or arising from any
such claim, suit, action or proceeding. It is understood and agreed that ____________ does not intend
and will not be required to edit or review for accuracy or appropriateness any Licensor Content.
iii.
Subject to the limitation of liability set forth in Section __ ("Limitation of Liability"), Distributor will
indemnify _________ for, and hold _________ harmless from, any loss, expense, damages, claims,
demands, or liability arising from any claim, suit, action or demand resulting from: (a) the material
uncured breach of any terms of this Agreement: (b) the use of the Licensed Software and Ancillary
Programs by any Customer of Distributor except for claims which arise directly from or relate directly
to material uncured breaches of _________'s obligations under this Agreement or fall within
_________'s indemnification obligations under this Agreement, including but not limited to
_________'s warranties with respect to the Licensed Software; or (c) any claim related to the Value
Added Offering.
10. Choice of Applicable or Governing Law
A fundamental clause in this section is the law chosen for the interpretation of the license and the court chosen
for submitting a claim against the vendor or customer. From a perspective of cost, it is advisable that the parties
amend this clause to the law and the court that is most convenient for both the vendor and customer. For a
transaction between two companies based in North America, it would be inadvisable to use European law for
25
the interpretation of a license and end up having to go to court in Brussels to try the case. In reality, the vendor
and the largest party to the transaction most often gain "home court" advantage in the courts.
In the software service transaction, the choice of law may bear particular scrutiny. As customers can easily sell
and deliver application services to overseas customers, the transaction may quickly expand to numerous
jurisdictions. If the transaction is not placed within a law and a court from the outset, the parties may find that
jurisdiction becomes a thorny issue.
Sample Applicable or Governing Law Provisions:
i.
The agreement shall be governed by, and construed in accordance with laws of the State of
_________if licensee is located in United States, and by the laws of the Province of /Country of
_________ if licensee is located in Canada/Europe/Asia without regard to conflict of law rules or
(insert any commercial code).
ii.
This Agreement shall be governed by and construed in accordance with the laws of the
State/Province of ____________, except that body of law known as Conflicts of Law. All actions
or proceedings arising directly or indirectly between the parties, other than those for injunctive
relief, shall be litigated in courts located within the County/State/Province of __________.
Developer consents to the jurisdiction thereof and agrees not to disturb such choice of forum. If
Developer is not a resident of California, Developer waives the personal service of any and all process
upon it, and agrees that all such service
11. Assignment
In most jurisdictions, commercial contracts are not easily assignable. An assignment enables a party to release
from all obligations under the contract and to pass them on to the assignee. The case law on assignment is
complex and not always certain. In addition, sub-contracting is often permitted under general law since the
original party to the contract remains liable for the performance of the sub-contractor.
In the software services agreement, assignment may be impacted by the rapid transformation and increasing
levels of consolidation of software services providers. As companies acquire and shed lines of business, merge
with and acquire competitors, strike new partnerships and alliances, or lease infrastructure from new suppliers,
assignment may have to be permitted to enable the seamless provision of services. If an agreement completely
prohibits assignment and requires that a new agreement be drawn up for every change to a vendors ownership
situation, down time taken to craft a new agreement may lead to an untenable situation for customers.
Sample Assignment Provisions:
No Assignment:
i.
This agreement and all rights and obligations of both parties shall not be pledged, mortgaged, assigned
or otherwise transferred or disposed of, including by operation of law, in whole or part, by either party
except as expressly set out in this Agreement or as consented to in writing by the other party.
Limited Assignment:
i.
This Agreement shall be binding upon and inure to the benefit of the successors or assigns of each
party, however, this Agreement is not assignable by either party without the prior written consent of
the other party, except that this Agreement may be assigned to an Affiliate, or to a successor to all or
substantially all of the assets and business of the assigning party, provided that such Affiliate or
successor in interest agrees to perform all the responsibilities of the assigning party and the assigning
party guarantees such performance.
26
12. Amendments and Modifications
The amendment provis ions in a license describe the circumstances and terms under which the agreement be
modified. Also, the processes for modification of the agreement are set out. Provisions can differ in
requirements for written documents and signatures required. If only one party needs to sign a new provision,
the change can be construed as an amendment to the agreement.
Sample Amendment Provisions:
i.
This agreement may not be modified or altered except by written instrument executed by the party
against whom enforcement is sought.
ii.
This agreement may not be modified or altered except by written instrument duly executed by both
parties.
13. Force Majeure
Force majeure provisions identify circumstances beyond the control of the parties that prevent performance
under the agreement. The effects of the force majeure provisions are to limit liability and prevent breach of
contract.
A force majeure is a condition beyond the control of the parties such as war, strikes, floods, power failures,
destruction of network facilities, etc that was not foreseen by the parties and which prevented performance
under the contract. Most licenses build in provisions that any party’s failure to perform any term of condition
under the license due to a force majeure will be excused and the failure to perform in those circumstances will
not be deemed a breach of the agreement.
In the SaaS agreement, force majeure may be impacted by:
-
The use of the Internet, with its inherently unpredictable service levels, as a means of delivery;
The challenge of identifying points of failure in a distributed network environment; and
The prevalence of disaster recovery and re-routing capabilities in the Internet application marketplace.
Sample Force Majeure Provisions:
i.
Neither party shall be responsible for delays nor failure of performance resulting from acts beyond the
reasonable control of such party. Such acts shall include, but not be limited to, acts of God, strikes,
walkouts, riots, acts of war, epidemics, failure of suppliers to perform, governmental regulations,
power failure, earthquakes, or other disasters.
ii.
Neither party hereto shall be liable for any delay or failure to perform any provision of this Agreement
if such delay or failure arises directly or indirectly out of any act of nature, acts of a public enemy,
earthquake, flood, government order, riot or any other cause beyond the reasonable control of ODC or
Supplier.
14. Dispute Resolution
When a dispute arises that the parties to a contract cannot resolve between themselves, their normal recourse is
to the courts. However, alternatives exist to this often lengthy, expensive and painful process. In the software
as a service market, the choice of litigation, arbitration or mediation may be impacted by the nascent nature of
the industry. The key characteristics of the marketplace and the legal environment include:
27
-
Keeping customers happy is at a premium -- most companies are hesitant to take customers to court;
Start up vendors with few legal resources at their disposal; and
There are few established precedents for software services.
The Application Service Provider Industry Consortium, together with the World Intellectual Property
Organization (WIPO), are establishing arbitration procedures and a forum for the resolution of disputes
involving hosted application providers and their customers.
A. Litigation
Neither an arbitration or modification clause removes the need for a legal clause, specifying the legal system
that will govern the contract and its performance and interpretation, and for a clause deciding which court shall
have jurisdiction in the case of legal disputes.
Litigation through the courts is suitable for disputes both over fact and law. The judge is paid for by the state.
Litigation may be commenced by either party and does not require the agreement of the other. The decision of
the court is binding in all cases and there is usually an established appeals procedure. The major advantage of
litigation is that it is so slow, costly, arduous and beneficial to nobody but lawyers that it ultimately forces
settlement.
B. Arbitration
Arbitration is a dispute settlement through an arbitrator appointed by the parties by contract and not by the state.
Both parties usually share the arbitrator's fees. It is more private and less formal than court proceedings;
although it is becoming more and more formalized. Awards made by an arbitrator can be binding on the parties
and can be enforced by the court. The major advantages of arbitration include
Speed;
Less cost;
Informality (relative to courts);
Increases incentive to agree within process; and
Minimal discovery procedures.
C. Mediation
Mediation is an informal procedure where the parties agree by contract to refer a dispute of fact to an expert
appointed by the parties for his resolution. It is not really suitable for any dispute where issues of law are likely
to be canvassed. Both parties usually share the expert's fees. It is binding on both parties and the court may
enforce determinations. There is no possibility of appeal, save perhaps in the case of outright fraud or error.
Sample Dispute Resolution Provision:
In the event that any dispute or disagreement between the parties with respect to the interpretation of any
provision of this Agreement, the performance of either party under this Agreement, or any other matter that is in
dispute between the parties related to this Agreement, upon the written request of either party, the parties will
meet for the purpose of resolving such dispute. The parties agree to discuss the problem and negotiate in good
faith without the necessity of any formal proceedings related thereto. No formal proceedings for the resolution
of such dispute may be commenced until either party concludes in good faith that the applicable resolution
through continued negotiation of the matter in issue does not appear likely. The parties further agree that all
disputes hereunder which cannot be settled in the manner herein before described (any such dispute is referred
to here as a "Dispute") will be settled by final and binding arbitration conducted in accordance with the
American Arbitration Association ("AAA") (or any successor thereto), as amended from time to time. The
Federal Arbitration Act, 9 U.S.C. Secs. 1-16, shall govern the arbitrability of all Disputes. Judgment upon the
award rendered in any such arbitration may be entered in any court having jurisdiction thereof, or application
may be made to such court for a judicial acceptance of the award and enforcement, as the law of such
jurisdiction may require or allow. The arbitrator shall not have authority to award punitive damages. All
expedited procedures prescribed by the AAA rules shall apply. The arbitrator's decision and award shall be final
and binding and judgment may be entered in any court having jurisdiction thereof. Each party shall bear its own
28
costs and attorneys' fees, and shall share equally in the fees and expenses of the arbitrator but the arbitrator shall
have the discretion to award costs and attorney's fees in his discretion.
The arbitration panel will be composed of one single arbitrator engaged in the practice of law, under the then
current rules of the AAA. No person may be appointed as an arbitrator unless he or she is independent of the
Applicant and Respondent, is skilled in the subject matter of the Dispute and is not directly or indirectly
carrying on or involved in a business being carried on in competition with the business of the parties. The
decision of the arbitration panel shall be made by the sole arbitrator. The venue for the arbitration shall be in
Washington, DC unless otherwise agreed to by the parties in writing.
15. Notices
The articles on notices name the official representatives of the parties and describe the processes for
transmitting communications related to the license agreement. Notices are typically required when a party wants
to terminate the agreement, when an acceptance or rejection of an offer or amendment has taken place, and
when a suit is brought by a party. A couple of "rules of thumb" for notices are:
-
notices should be given in writing; and
proper mailing addresses should be set forth in the notices clauses of the agreement.
Sample Notice Provisions:
i.
All notices or demands of any kind related to this agreement shall be in writing and may be served
personally or by prepaid United States mail (return receipt requested) or by private mail service (e.g.
Federal Express, UPS) if a confirmation of delivery is obtained, in either case to the following address
________________________________________.
ii.
Copies of all notices to ____________ shall be sent to the attention of _____________. Either party
may, by notice in writing to the other party, designate a different address to which all further notices
and demands are hereafter to be addressed.
16. Relationship of the Parties
Provisions regarding relationship of parties describe how the transaction is to be structured and identifies the
choice of a business relationship.
Samples of Relationship Provisions:
Specifies no relationship:
i.
This agreement creates no relationship of joint venture, partnership, limited partnership, agency or
employer-employee between the parties, and the parties acknowledge that no other facts or relations
exist that would create any such relationship between them. Neither party has any right or authority to
assume or to create any obligation or responsibility on behalf of the other party except as may from
time to time be provided
Specifies a relationship:
i.
The parties shall be deemed for all purposes to be _________ (partners, independent contractors, etc.)
The Agreement shall not constitute either party the agent, employee or representative of the other, nor
shall either party have the right or authority to assume, incur or create any liability or obligation of any
kind on behalf of the other party.
29
ii.
Relationship of the Parties. In all matters relating to this Agreement, ________ is an independent
contractor. Neither party will represent that it has any authority to assume or create any
obligation, express or implied, on behalf of the other party. Nothing stated in this Agreement shall be
construed as constituting ________ and Developer as partners or joint venturers, or as creating the
relationship of employer and employee, principal and agent, master and servant, or licensor and
licensee between ________ and Developer.
17. Entire Agreement
The entire agreement (or integration) clause is often buried deep in the "boilerplate," but is a very powerful and
important article. This clause literally means what it says: if something is not in the written contract, it is not
part of the deal. Promises made by sales representatives, statements contained in advertisements, and
statements made during negotiations are not part of the deal and are not binding unless included in the final
contract. Entire agreement provisions will not always protect vendors, not will it always work to defeat claims
of the re-distributor or user. In situations involving fraud, unconscionability, mistake, clear evidence that the
written agreement is not the entire agreement, the effect of the integration clause may be defeated.
Sample Integration Clause:
i.
ii.
This Agreement sets forth the entire agreement and understanding of the parties with respect to the
subject matter of this license, and merges all proposals, prior discussions or prior agreements between
them.
This Agreement is the parties' entire agreement relating to the Software. It supersedes all prior or
contemporaneous oral or written communications, proposals, warranties, and representations with respect
to its subject matter, and following Licensee's acceptance of this license by clicking on the "Accept"
Button, will prevail over any conflicting or additional terms of any quote, order, acknowledgment, or any
other communications by or between the parties. No modification to this Agreement will be binding,
unless in writing and signed by an authorized representative of each party.
18. Severability
A severability clause permits the agreement to continue in force even if certain provisions are deemed
unenforceable.
Sample Survival and Severability Provisions:
i.
The warranties and the indemnification and confidentiality obligations set forth in the agreement shall
survive the termination of the agreement by either party for any reason
ii.
In the event that any of the provisions of this Agreement shall be held by a court or other tribunal of
competent jurisdiction to be invalid or unenforceable, the remaining portions of this Agreement shall
remain in full force and effect and shall be construed so as to best effectuate the intention of the
parties in executing it.
iii.
Each provision of this Agreement is severable from the entire Agreement, and in the event that any
provision is declared invalid or unenforceable, that provision shall be amended if possible to be
enforceable, but in any event, the remaining provisions hereof shall remain in effect. No waiver by
either party of any default shall operate as a waiver of any other default or of a similar default on a
future occasion. No waiver or amendment of any term or condition shall be effective unless in writing
and signed by the party against whom enforcement is sought. Neither party shall be liable for any
failure to perform any obligation hereunder (except a failure to pay) due to causes beyond its
reasonable control.
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ABOUT SIIA
The Software & Information Industry Association (SIIA) is the principal trade association of
the software code and information content industries. SIIA represents more than 1,000
leading high-tech companies that develop and market software and electronic content for
business, education, consumers and the Internet. For further information, visit www.siia.net.
Software as a Service Initiative
The "Software as a Service" (SaaS) model holds great promise for technology providers and
consumers alike. A robust future for the software service model, however, is not assured as
the industry faces a litany of challenges that must be addressed head on. SIIA, as a neutral
third-party working to validate the business model, is uniquely positioned to address these
challenges, illuminate benefits and drive acceptance among industry analysts and potential
customers. SIIA's Software as a Service Initiative seeks to achieve two major goals for
member companies in the space:
•
•
Development of the space through identification of business model trends, best
practices and model contracts dealing with channel, legal and security issues.
Promotion of the model to encourage and facilitate new ISV/xSP/IBS partnerships,
and to shape ongoing coverage of SaaS in media to broaden customer recognition and
acceptance.
31

The SIIA Guide to Licensing Software as a Service

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