May 6, 2009
Previously published on April 22, 2009
When a company is provided with a software vendor’s “standard” license agreement to sign, the company often signs without taking an opportunity to negotiate the terms contained in the agreement. These agreements, however, are not one-size-fits-all, and careful consideration of their terms is important to ensure that your business has the rights to use the software in the manner intended, and that you are protected against unaccepted damages that may not be covered under the vendor’s boilerplate terms. Technology attorneys negotiate these types of agreements frequently to ensure that their clients receive the services and protections they expect as a part of the software purchase. The following is a brief overview of some of the areas to consider when presented with a software license agreement.
1. Warranty
Many initial drafts of license agreements state that software is provided “as-is”, with no warranties whatsoever. Whether this is acceptable to your company may depend on how important the software is to your business operations and how it affects your computer systems. Is there a description of the software that you expect the software to meet? How extensively will an unexpected failure of this software affect your business? Is there a chance that a malfunction of this software could introduce a virus to your company’s computer systems? Also consider the time period in which any warranty breach should be resolved. Depending on the company’s reliance on the software, the remedy period could range from minutes to several days, even up to several weeks. Can your company afford to be without critical software while the vendor tries to figure out the problems? If the vendor cannot resolve the problems, what remedies are you provided? You may want to engage the assistance of a technology attorney to negotiate specific warranties addressing the protections that your company needs.
2. Maintenance and Support
Maintenance and support offered by the vendor can range from simple and straightforward to extremely detailed and complex. Before signing off on the terms initially proposed by the vendor, a company should consider exactly the type of training, support and maintenance that it will require, and how it expects to pay for it. For example, should support to be provided by telephone during reasonable business hours, free of charge? Or will support require on-site visits from support technicians? Will your company be obligated to implement a virtual private network to receive support? How quickly will the vendor respond to your issues? What type of corrections can you expect to receive and when? Will the vendor install your software or even assist in installation and implementation? Are there extra charges for these services? Is special training required for the company’s employees? Support terms may also be broken down to reflect the severity of the problem and the amount of time in which an error must be resolved. Charges for support and maintenance may be lump sum, annual or as-needed.
3. Updates and Releases
A licensee should consider its expectations with respect to new versions of the software being licensed, as well as revisions to the current version. If your company does not purchase a new version, will its version of the software still be supported by the vendor? How often will the vendor issue new releases? Will your company be required to update its existing operating system in order to be compatible with the software and future releases?
4. Infringement Indemnification and Remedies
What if your company is sued due to its use of software that infringes the intellectual property rights of a third party? Your company may not only need the vendor to pay for its damages, but you also to pay and arrange for the defense of any lawsuit. Indemnification, defense and hold harmless clauses are complex legal terms of art that, if left as initially drafted by a vendor, may not provide a licensee with the protections that it expects in the event of an infringement action. Because the cost of patent and other intellectual property infringement lawsuits are especially high, negotiating an acceptable level of protection is extremely important.
5. Relocation and Copies
If there is high turnover of the computer systems in your business, you may need to consider whether the provisions of the agreement concerning authorized copies and relocation of the software are adequate.
6. Transfer of License
License agreements frequently provide that the license is provided only for use by the licensee and is not transferable to any other person or entity. Consider whether a circumstance may arise in which your company needs to transfer its licenses to a subsidiary or affiliate, or perhaps to a third party in a merger or acquisition. License agreements may be drafted in such a way as to allow for these various eventualities without delays or additional charges to your company.
7. Proprietary Rights
A software vendor has a strong interest in protecting its proprietary rights and, as such, will likely present aggressive language in its license agreement regarding the subject of ownership. While your company, as a licensee of the software, may have no desire to claim the vendor’s existing intellectual property rights, consider whether anything your company does with or to the software will give rise to a new proprietary right. If so, should your company be the proper owner of such right? Many agreements are drafted in such a way as to allow the vendor to retain ownership of anything developed in connection with the licensed software, even if it is created through the use of the licensee’s proprietary or confidential information. If this is not acceptable, consider engaging an attorney specializing in intellectual property issues to carefully craft and negotiate the proprietary rights provisions of the agreement.
8. Source Code Escrow
If the software being licensed to you is crucial to your business, you may want to request a source code escrow. This will provide assurance that the source code is available even if the vendor declares bankruptcy or goes out of business.
If you are like most of our clients, you want your software to work efficiently, effectively and with few or no headaches. Sadly, that's not often the case. Nonetheless, avoiding these eight common pitfalls when negotiating your software licensing agreements will protect your company and you from protracted and expensive disputes with vendors.
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