Software License Agreement Help Guide

For a business, its software is intellectual property and a valued business asset. It deserves certain protections and defined terms and conditions when the software is being used by a customer. LegalNature's software license agreement helps articulate how the licensor and licensee want the software to be used and help the parties establish a sound business relationship based on the benefits the software offers.

Important: This software license agreement is appropriate for situations where the software owner (the licensor) permits or licenses the software "as is" to the user (the licensee) for their use. It does not provide any additional development, customization, or servicing by the licensor. This is not a software development contract to customize the software to the licensee's unique specifications. This agreement is also not a "Software as a Service" (SaaS) agreement where the software is generally hosted by the licensor and made available to the licensee for access on a pay-per-use or subscription basis.

Definitions

The definitions section of LegalNature's agreement contains a list of words or concepts that have very specific meaning within this agreement alone. For example, the word "Documentation" in the context of this agreement does not mean any information or records, but rather manuals and documents specifically relating to the software's functionality, components, features, or requirements. When reading through the agreement, remember to consult this section for any defined terms to understand their specific significance and effect within this software license agreement.

License Details and Grant

This section contains the main details about the scope of the license granted using the answers you supply regarding the license's access and use parameters.


Exclusive or Non-Exclusive License

An exclusive license gives the licensee exclusive right to use the software. No one else will have the right to use the software during the time frame that the licensee has the right to the software as its sole user. This type of license generally garners a higher fee from the licensor since the licensor cannot generate additional profits by licensing the same software to other customers. A non-exclusive license can be used by many unrelated users so long as the licensor grants permission for their use.

Sublicense

Sublicensing concerns how the licensee can use the software in relation to third parties not included in this contract. Software sublicensing is the concept that a third party may use part or all of the software through their relationship with the licensee alone. For example, if sublicensing is allowed, the licensee may allow a non-related third party to use the licensor's software and even receive payment for the third party's use of the licensor's software.

Licensors generally want control over the distribution of their software and may prefer to grant licenses that do not allow sublicensing. In making this license non-sublicensable, any third party that wants to use the software will need to obtain a license directly from the licensor instead of going around the licensor.

License Assignment or Unilateral Transfer of Rights

An assignment is different from sublicensing in that it transfers all the licensee's rights and responsibilities contained in this agreement on to a third party. This is a major change to any agreement and essentially changes who the licensor is contracting with. Customarily, such a change to the parties in a contract would require the consent of all parties. However, if the licensor is comfortable with contracting with any third party as long as they accept all the terms in this agreement just as the licensee did, then you will indicate that the license may be transferred unilaterally by the licensee. If the licensor wants full control and the opportunity to vet who uses their software, then you will not want to allow unilateral transfer.

Access and Use

Software access and use is particularly important in a software license agreement because, unlike a traditional business asset like a physical computer or machine, software can be extremely easy to copy, duplicate, or transfer. To control the value of the asset, licensors can place contractual limitations on the license granted to the licensee. For example, this software could be limited for use 1) on only 10 of the licensee's computers, or 2) for 30 of licensee's employees, or 3) on an unlimited number of computers and users but only at the licensee's offices, or 4) on two of the licensee's computers and keep one copy as backup for disaster recovery only. LegalNature allows you to customize the software's access and use criteria and create your unique license grant. If the license grant does not have any restrictions on the number of copies or locations of access, then you will need to allow the licensee to use unlimited copies of the software from any location.

Open Source Licenses

Some software contains open source code or technology that is widely available for a variety of uses. However, such use of open source code or technology actually comes with its own open source license or public license. The licensor should be aware that if any part of their software contains open source components, the open source or public license information often requires the components to be readily identifiable and documented.

License Restrictions

Beyond the number of copies or location access for the software, there are some general prohibitions that the licensee must comply with. This section articulates these prohibitions. The prohibitions generally protect the intellectual property of the licensor and include common sense restrictions. For instance, the licensee may not copy the software, lend out the software without the licensor's permission, reverse engineer the software, bypass the software's security measures, misappropriate the licensor's intellectual property in any part of the software, use the license in applications that could result in injury or death, or use the software outside of the limitations of the license grant in general.

Term

The term establishes for how long the licensee can use the software under the parameters set by this agreement. If the parties want to continue the software license agreement indefinitely until one party decides the relationship is no longer suitable, then you may enter "Perpetual" for the term duration. If the parties know in advance exactly when the licensee will stop using the software under the terms of the agreement, then you may input that specific date. If the parties want to establish the duration of the contract in terms of a period basis such as "five years" or "18 months," then enter the duration.

Delivery

Software may be delivered to the licensee in a variety of ways. The traditional method is a physical delivery on a tangible storage media such as CD, DVD, USB, external hard drive, and the like. This may add physical delivery time through the post or require coordination between the licensor and licensee to meet and receive the physical storage media. It has also become commonplace to deliver software electronically via email, through private networks, downloaded from hosted websites, and more. This method could make the delivery time more instantaneous but may require a certain degree of technological sophistication from both the licensor and licensee. The licensor and licensee should consider and select the delivery method, time frame, and location that suits both parties' needs.

Installation

Some licensors offer installation services as an added bonus for the licensee's convenience and to ensure their software is installed properly. Other licensors prefer to leave the installation to the licensee and avoid any liability that may arise from using the licensee's computers or network systems. The details regarding installation service, if any, should be decided in this agreement so both parties have the same expectations about who will set up the software.

Fees and Taxes

The license fee is basically the cost of licensing the software. It can be measured by different metrics. Some companies prefer a lump sum total for unlimited use restrictions; others prefer to pay for their exact use, such as having a fixed fee per user, per computer used, per installation, or per location used. LegalNature allows you to choose from all these options to decide the appropriate pricing basis for your agreement.

While the license fee is the most common type of fee in a software license agreement, your agreement may include other fee types and structures such as an installation fee and training fee for the licensor to teach the licensee and their employees or representatives how to make the most of the software. Taxes are not included in this contract, so the licensee should be aware that it is responsible for any taxes that may be assessed in this agreement.

Payment

In addition to the manner in which the software is used and the fee structure considerations, payment for the fee is often dependent on the business relationship between the licensor and licensee. When deciding on what kind of payment structure to use, the licensor may wish to take into consideration the duration of the agreement, the creditworthiness of the licensee, and how the licensee will use the software and then evaluate what is commercially reasonable based on all these factors.

This agreement also includes a standard late payment term that provides some remedy options for the licensor if the licensee is late on payment. These remedies include the ability to charge interest or obtain reimbursement for the licensor's costs, such as the cost of using a collection agency, disabling the software technically, or suspending or terminating this software license agreement altogether.

Acceptance

This section affords the licensee the ability to reject the software or make sure the software works properly before the licensor is deemed to have completed their obligation of delivering on the software. It sets out a process by which the licensee determines the criteria of what it means for the software to be working properly. For example, a test for a spreadsheet-like software function could be to calculate the appropriate numbers in a formula with expected results. The licensor will carry out the test with the licensee or its representative present and both parties can witness the software being tested.

Ideally, the software test will succeed and the licensee will accept that the software is working properly. However, if the software should fail and generate unacceptable or unexpected results, the licensor has the opportunity to correct the software error. Additionally, if the licensor is unable to address the software error, the licensee has the opportunity to reject the software and terminate the agreement.

Acceptance testing may be appropriate if the licensor and licensee both want a process that assures the software functions as described. It is a quality test for the licensee and documentation of properly functioning software for the licensor. This is an optional process available in this form to help both the licensor and licensee establish a fair way to test the software.

Maintenance and New Version 

From time to time, the licensor may release updates on the software that does not substantially change the software's functions but enhances the software in minute but helpful ways. This is a maintenance release and is offered at no cost to the licensee. It is vastly different from a new version of the software that contains many more changes and upgrades.

LegalNature's software license agreement grants the licensee the right to receive any maintenance releases that may be released at the licensor's sole discretion during the term of this agreement. However, the licensee does not have any rights to new versions of the software. If the licensee wishes to use a new version of the software, the licensee must enter into a separate negotiation and software license agreement with the licensor.

Title, Intellectual Property Rights, and Infringement

This section affirms that the licensor is the proper owner of the software and no part of the software is sold to the licensee. This is purely a license, or permission, to use the software. The licensee also agrees to cooperate with the licensor to protect the intellectual property that is this software during the duration of this agreement. This includes safeguarding the software, informing the licensor of suspected or known intellectual property infringement, and assisting the licensor in any claims or actions where the licensor tries to prosecute third parties for infringing on the licensor's rights over this software.

Security Measures and Usage Tracking Disclosure

If this software contains any mechanisms that detect unauthorized use that includes a certain degree of the licensor's control or monitoring of the licensee's use, then indicate that the licensor can control or monitor the licensee's access. This disclosure is included to ensure transparency to the licensee that their information may be collected or viewed incidental to their ordinary software use.

Verification (On-Site Compliance Monitoring)

The licensor may, from time to time, request verification from the licensee that the software is being used according to this software license agreement. If the licensee agrees, this agreement can also include a right for the licensor to conduct a non-intrusive on-site audit. If the verification or audit indicates that the licensee is using the software beyond the scope agreed upon in this agreement, additional fees would be negotiated at that time.

Confidentiality

As with any business relationship, confidential information and trade secrets may be disclosed and exchanged. Both parties must determine and agree on how long to keep such confidential information private and only to disclose such information when compelled to do so by law. The duration of confidentiality may be the same as the duration of the license or much longer.

Termination and Effects

This section outlines all the ways in which this agreement could be terminated and which party can seek to terminate this agreement under the described circumstances. Upon termination of this agreement, it is important that the licensee immediately stops using the software, returns or destroys the software and any confidential information, and pays all amounts due under this agreement.

Mutual Representations and Warranties

In order to enter into a commercially reasonable agreement, the licensor and licensee affirm and assure each other in this section that they are legally constituted entities that can do business, either under their own personal name or as an LLC or corporation, and have the full right, power, and capacity to enter into such a contract.

Licensor's Limited Warranty

LegalNature's agreement provides a limited warranty of the software for six months or for the duration of the agreement, whichever is less. The warranty assures the licensee that the software and any maintenance release operate as described when properly installed, and if the software is provided on a separate media, that media is not defective. Everything else, if not included specifically in this section, is not warranted and is to be accepted "as is" by the licensee. The limited warranty is additionally limited and not applicable if the software is improperly used, damaged, or modified by the licensee, or in error because of causes outside of the licensor's reasonable control.

The licensee's remedies under the limited warranty include the licensor replacing the software, the licensor repairing the software, or either the licensor or licensee terminating this agreement early with appropriate pro rata refund by the licensor of any prepaid license fee.

Indemnification

Indemnification is a concept for securing another party against loss or damage. In the case of the licensor's indemnification, the licensor agrees to secure the licensee and its representatives against actual losses from actions where a third party claims the licensor's software is an infringement of the third party's intellectual property rights.

In the case of the licensee's indemnification, the licensee agrees to indemnify the licensor and its representatives against actual losses from actions from a third party that somehow relates to this agreement.

Limitation of Liability

Limitation of liability is a standard contract provision that protects both the licensor and licensee from the amount of exposure they each face if any action is filed against either party in relation to this agreement. It caps the amount of potential damage the parties may seek from each other and should always be read carefully so all contracting parties understand their risk exposures.

Export Regulation

Software, like other commercial objects, may be subject to export control rules and regulations such as the United States Export Administration Act. For example, there is sensitive software that cannot be exported to certain restricted countries. If the licensee seeks to export the software, the licensee must conduct its own due diligence regarding applicable export laws and affirm their compliance with all applicable laws.

Force Majeure

On rare occasions, there may be events or circumstances out of the licensor's or licensee's reasonable control that prevents this agreement from operating as intended for a period of time. For example, the licensee may be late on payment when their bank's server experienced a severe weather-induced power outage. In such uncontrollable and unpredictable circumstances where no party is intentionally at fault, this term provides an allowance for the breach if it is under 30 days and the ability for either party to cancel this agreement if the event continues for longer than 30 days.

Governing Law and Dispute Resolution Options

The choice of law that governs this agreement is an important selection. Often, parties select the law of the state where they are located because of familiarity. This form allows the parties to select the agreed-upon state law that will dictate how this agreement will be interpreted if any conflict should arise in the future.

Furthermore, LegalNature's document allows the parties to decide whether conflict should be resolved in a public court of law or in private arbitration. If the licensor and licensee wish to litigate in public court, select "No" when asked if arbitration is required. If the parties wish to resolve any issues privately as decided by an independent arbitrator, select "Yes" for the same question.


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