September 5, 2012
By Milton L. Petersen, HunterMaclean
Technology is becoming ever more pervasive in our society, which means nearly every company needs to license software programs and packages in order to operate effectively.
While the license terms of commercial, off-the-shelf, shrink-wrapped software packages are generally not negotiable, the license terms for software requiring a larger investment, or for modifications, enhancements, or customizations to the licensor’s standard product, often are. In either case, companies need to read their license agreements and understand how they are permitted to use software, in order to avoid disputes with the software licensor or paying unexpected additional fees.
In the traditional software licensing model, the licensee pays a one-time, relatively large license fee and receives a perpetual license to the software in return. However, due at least in part to how quickly technology changes and evolves, the concept of a “term license” (under which the licensee may use the software only for a specified period of time, with lower but recurring license fees paid on a “pay as you go” basis over time) is becoming increasingly popular. “Software-as-a-service” (or “SaaS”) takes things even further, where there often isn’t an actual license grant and the customer never receives a copy of the software. Before entering into any agreements, companies need to consider which licensing model is most cost-beneficial and best suited to their particular needs.
Companies also need to consider who (or what entities) will be permitted to access to the software. Some companies may be part of a large corporate organization, and various affiliates and subsidiaries may need to use the software. Customers and suppliers may also need to access and use certain outward-facing systems. And, in some cases, third-party consultants and service providers may need to be able to use the software in order to provide their services to the licensee. If the applicable agreement doesn’t provide the rights for the licensee to let others use the software as required, the licensee may well have to pay additional fees to obtain those rights in the future.
Software vendors sometimes attempt to limit where the applicable software may be used, restricting use to specific sites or within a certain geographic area. Similarly, a software agreement may restrict the ability of the licensee or customer to assign the agreement to another entity in the event of a merger or acquisition. As the world becomes more interconnected and business becomes more global, these types of limitations are becoming increasingly problematic.
Various quantitative restrictions or limitations may also be imposed by software agreements. For example, there may be limitations as to the maximum numbers of “named users” or “concurrent users” permitted to use the software. Restrictions might be placed on the number of servers on which the software may be installed and used or on the number of copies that may be made of the software. Sometimes software usage is tied to various other metrics, such as a maximum transaction volume or the licensee’s revenue. In any of these situations, exceeding the specified levels or metrics will likely result in additional fees being owed.
To avoid disputes with software vendors and unexpected additional fees, software licensees and customers need to review the terms of their software agreements carefully. Where possible, appropriate changes to the software vendors’ form agreements should be negotiated.
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Milton L. Petersen is a partner with HunterMaclean’s Information Technology Practice Group. He can be reached at 912-238-2629 or mpetersen@huntermaclean.com.
