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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.

Frequently Asked Questions

What is a software license?

A software license allows a person or business (the licensee) to use software developed by another party (the licensor). The license itself is a legally binding document that allows the licensee to use the software without violating the intellectual property rights of the licensor.

It is similar to a product or service agreement in that it sets out the rights and obligations of both parties with regard to the software. The parties should have an opportunity to negotiate their rights before entering into the agreement.

A software license is not the same as an end-user agreement that you would see on websites or apps where the user must accept the terms before using the software. It is also not the same as development software, which involves a customization process for the end user’s specific needs.

Keep in mind that a software license agreement also differs from a technology services contract in that a technology services contract sets up an ongoing services agreement between an IT contractor and its client, but does not involve licensing and downloading specific software to a computer or other device.

Who is a licensor? Who is a licensee?

In a software license agreement, there are usually two parties: the licensor and the licensee. The licensee is the individual or entity in the relationship that receives the license, and the licensor is the person or entity that provides the license.

The licensor is often a creator or inventor whereas the licensee can be a variety of individuals or entities, including end users, manufacturers, other businesses, etc. As a software license agreement can be extremely flexible, it is often a good option for a variety of relationships and circumstances.

How is a license different from ownership?

When you own something outright, the manufacturer or designer often has little control over what you do with the product post-sale. In most circumstances, you can manipulate the product however you want and even reproduce it and sell it. Consider an example of a physical product. If you bought a chair, you could copy how the chair was made and create another one for your home. You could also paint the chair or change certain features of it. You could even resell it if you wanted to do so.

In contrast, having a license only allows you to use the product. You often cannot change it, copy it, or resell it unless you have specific permission to do so. In our chair example, you could use the chair, but you may not be able to do anything else with it. You could not sell it to someone else or change it in any way.

You will usually see licenses in the context of software or design and specifications. In the software context, the license will usually restrict users from altering, copying, or selling it to another person. Software developers use licenses, as opposed to an outright transfer, to help decrease potential problems associated with over-sharing that can reduce demand and limit profits.

A license will describe how a product can be used. That is, copying or distributing may be allowed according to the software license agreement, but it must be specifically stated to be permitted.

What are some examples of software license agreement provisions?

Software license agreements are extremely flexible, so they can include a variety of unique terms and conditions. The following example provisions may be addressed in the agreement:

  • Whether the software can be downloaded on more than one computer
  • How the software can be used (such as for personal or business use)
  • Information about the requirements to use the software (such as system requirements)
  • Whether the end user is to modify the software or view the coding
  • Whether the software provider will provide any training or additional information regarding the software
  • Whether the software is subject to a warranty
  • Whether the licensee is permitted to copy or mimic the software
  • How long the agreement will remain in effect
  • How the agreement will terminate
  • Remedies available if the licensee violates the license
  • Which state’s laws may govern the agreement

Like any contract, you can adjust the software license agreement to suit your unique needs. These agreements can even vary between the individuals or entities using the software. For example, you may want to prohibit one user from engaging in specific activities that another user is permitted to undertake.

What is an “exclusive license”?

Contrary to popular belief, an exclusive license is not a license that is only granted to one person or entity. Instead, the licensor agrees not to give the same license to others on the same terms. Such an agreement essentially prohibits a second level of licensing with the same rights to a third party. However, it does not prohibit granting a license to another entity or individual with different rights. The person holding the exclusive license is considered the owner of that particular right, which means that he or she can often take more action with the exclusive license compared to those holding only general licenses.

Exclusive licenses are limited to a specific scope or field, which usually involves a certain context, territory, or time period. For example, someone may be granted an exclusive right to manufacture a particular product in the United States while another entity may have an exclusive right to produce the same product in Europe.

What is software documentation?

For end users, software documentation includes the documents and instructions that come with the software. It is often referred to as the technical manual or user’s manual. It helps end users understand how to implement and use their software. This documentation details the capabilities of the software as well as certain limitations or system requirements necessary to run it. It may be included with the software as a booklet or it may be built into the program, delivered on a USB drive, or downloaded online.

Software documentation can also be much more technical and may even include source code and other information. It provides enough information so that the user or someone who wants to build on the software can do so without having to start from scratch each time. It may also include information regarding error codes and troubleshooting.

Software documentation sometimes includes information on how to market the product or information related to the design of the software as well. Depending on how the software is used or licensed, the documentation that accompanies it can vary significantly.

How can I limit the licensee’s use of my software?

The best way to limit or restrict someone’s use of your software is to have them enter into a software license agreement with you. The agreement should set out how the licensee can and cannot use the software. It should also set out what will happen if the agreement is violated. Negotiation is a powerful tool in the context of software licensing.

Software licensing agreements may also contain the following additional provisions:

  • Restrictions on remedies if the software is defective or does not comply with specific requirements
  • Limitations on liability (damage caps) if losses occur
  • Liability exclusions
  • Limitations on warranties
  • Alternative dispute resolution options
  • Information on copyright and ownership protections
  • The governing law if a conflict arises

Like any contract, you and the other party can include provisions that will work for your unique situation. You can be creative about limitations regarding the use and sale of your software. Just be sure that your creativity does not morph into making the agreement unreasonable or impractical.

What is “open source” software?

Not every type of software will include a restrictive license. “Open source” software is any software that can be accessed, changed, used, and shared without charge. Open source software is the same as “free software.”

There is no need to obtain an individual license because the developers of the software have chosen to share it with the world without restrictions. Nonetheless, open source software still technically has a license; it is simply not very restrictive.

Open source software can be developed by anyone and must meet 10 specific criteria for it to be labelled “open source.”

  • Free redistribution
  • The program must include the source code
  • Derivative work must be permitted (modification and alterations to the original software)
  • Restrictions on distribution of the source code is allowed if the software is modified, but only if patch files can be distributed as well
  • No discrimination against any group or person
  • No discrimination against any particular field
  • Rights associated with the license must apply to everyone that receives a redistribution of the software
  • The license cannot be specific to a product
  • The license cannot restrict the use of other software
  • The license must not be predicated on any style of interface or individual technology

Open source software allows developers the ability to learn and continue developing their own software by collaborating with others. Software sometimes starts out as open source in its early phases of development.

Open source software can be used for commercial purposes, and there is no way to restrict the utilization of the software. Developers also cannot control who uses the software and for what purpose, which is often a concern for those who may be using the software for illegal or unethical reasons.

What is an “open source” license?

Open source licenses comply with the requirements of open source software. Just because the software is open source, it does not mean that it does not have a license at all; the license simply meets the 10 requirements set out by the Open Source Initiative (OSI).

OSI reviews every license for software that would like to be listed as open source through a review process. Once the license is approved, then the software can be included in the open source resources.

While open source software certainly can be useful in the development stage, it will not be helpful if you want to make money off the software or restrict how the software is used. Instead, a more restrictive software license agreement is recommended to accomplish these goals.

What intellectual property rights should I be concerned about when licensing my software?

Intellectual property includes any creation of the mind, from physical inventions to artwork to software. As such, software is subject to certain intellectual property rights, but only if it is adequately protected. Intellectual property rights include the following:

  • Patents
  • Copyrights
  • Trademarks
  • Trade secrets
  • Know-how
  • Proprietary data
  • Registered designs
  • Customer or potential customer information

A license transfers some or all of these rights to another person or entity for their personal use. When you provide a license, you are essentially waiving some of your intellectual property rights to allow another person to use your idea or product. It allows the original owner to keep the majority of his or her rights, and can be an easier process to reverse compared to an outright transfer if a dispute arises.

Technically, a license could affect any and all intellectual property rights that an owner has. The software license agreement will explicitly set out which rights are and are not affected by the agreement. Most often, however, software licenses will correspond with trademark, patents, and copyright laws that protect the software.

Patents prohibit others from using, selling, or making a particular invention for a period of time, while copyrights protect certain material from being published. Trademarks may be affected in situations where the licensee wants to use a particular brand name in connection with a larger product, such as where the software is a piece of a larger package or product.

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Checklist

Step 1: Gather Information

As you complete your software license agreement, you will need to provide certain relevant information. This includes the permitted uses of the software, the software delivery method, installation and testing details, and the fees involved.

Step 2: Answer Key Questions

Use the information you collected to complete the software license agreement. We make this easy by guiding you each step of the way and helping you to customize your document to match your specific needs. The questions and information we present to you dynamically change depending on your answers and the state selected.

Step 3: Review and Sign

It is always important to read your document thoroughly to ensure it matches your needs and is free of errors and omissions. After completing the questionnaire, you can make textual changes to your document by downloading it in Microsoft Word. If no changes are needed, you can simply download the PDF version and sign. These downloads are available by navigating to the Documents section of your account dashboard.

This agreement allows the parties to sign and deliver copies electronically. Therefore, it is not necessary for both parties to sign a single printed copy of the agreement.

Step 4: Periodically Review and Update

It is easy to forget the ins and outs of your software license agreement. Periodically reviewing it will help you stay familiar with any responsibilities or requirements so that you can determine when it needs changes or additions.

Over time you may need to make changes and updates to the contract. Using a contract amendment allows you to specify your changes without having to create an entirely new agreement. This is helpful when you only need to make a few changes instead of a complete overhaul of the language.

When the time comes to renew your software license agreement for an additional term, LegalNature makes this process easy by saving your answers to the original agreement within the questionnaire.

Step 5: Complete Related Documents

Other documents may offer additional legal protection. For example, those who use software license agreements often incorporate a sales contract, invoice, and consulting services agreement into their existing business practices.