SOFTWARE LICENSE AGREEMENT: KEY STEP TOWARDS THE PROTECTION OF YOUR IP

15
Jun 2022

Contact: Anja Berić

ugovor o licenciranju softvera

How can I profit from my software without selling it? What is a license and which rights does it give to the users of my software? Does the license provide enough protection to my source code? How far does my liability for the software go? Am I obliged to guarantee its functionalities?

It is highly likely that, at some moment, every software-developing company has asked itself at least one of the questions above. The transfer of intellectual property (IP) is a burning issue of importance for every inventive and ambitious business striving to launch their newly created product out on the market, considering the risks which may accompany such a business venture. Rare are those who are willing to entirely waive the rights they hold as the original creators and owners of particular software, and that is exactly where the software license agreement enters the scene as the main asset for offering the software to potential users without transferring the ownership itself.

We have written about the negative consequences of the use of software in breach of the license (in Serbia, particularly) and the ways for companies to avoid the imposing of the possible penalties by the competent authorities by complying their business activities with the law. This time, we focus on a slightly different situation – in case your company develops the software that is being provided for use to the third party, it is immensely important to establish proper protection on time in order to prevent the risks that typically accompany any intellectual property transfer.

What does that mean? Simply, the first (and crucial) step is precisely defining the rights and obligations arising out of such a business relationship. As previously mentioned, the best way to do so is to enter into a comprehensively tailored software license agreement.

To Begin With – What Is A Software License?

Licensing copyright (software, in particular) basically means granting selected rights out of the wide scope of the rights belonging to the holder of the copyright – usually, that is its creator, although that doesn’t always have to be the case. By granting a software license, the owner of the software provides the user with the specified set of rights on the software, but the ownership itself does not get transferred.

For instance, by purchasing a license for a Microsoft Office plan, the user actually buys a right to use one (or more) counterparts of software in accordance with the terms of the software owner (Microsoft). Therefore, users’ authorizations are limited solely to those rights provided by the owner – right to use, copy, etc., whereas the ownership right remains with the owner – Microsoft.

This way, the software owned by one company (or individual) may be used by a wider scope of subjects who are obliged to comply with precisely defined rules. Such a partial transfer brings benefits to both parties involved:

The company that had developed the software (e.g. licensor) remains the owner, which enables it to keep the essential rights comprised in the copyright and to control the use of the software, while at the same time acquiring additional income from providing it to multiple customers.

A company using the software (e.g. licensee) gets to “buy” a specifically determined set of rights on the software critical for their own business activities for a smaller price than the one it would have to pay in case it purchased the software entirely.

The particular rights included in the software license may differ, depending on the type of license. Anyhow, typically the two main ones are the right to use and the right to reproduce the software in enough copies necessary for the internal purposes of the licensee. Besides these two “usual” rights, some additional rights may be granted to the company wishing to use someone else’s software, such as:

  • the right to distributethe software, which includes handing out copies of the software to third parties
  • the right to sub-licensethe software, which includes granting the specified scope of rights on the software to the licensee’s customers
  • the right to modifythe software and to create the derivative works out of it, which would, for instance, include creating a new version of the software.

Anyhow, the scope of the rights granted to the licensee depends entirely on the licensor who gets to decide on what their customer will be allowed to do with the licensed software. Generally speaking, when it comes to the proprietary license on software – the most restrictive among the licenses, the owner opts to solely grant to the user the right to use the copy of the software and eventually to make copies thereof for the internal purposes only, excluding the delivery of the software source code to the user or providing the permission for modifications or further distribution of the software.

On the other hand, you can anytime “loosen up” the protection of your software by establishing an OSS license and thus provide more freedom to your users in regard to the use of your software.

Which Rights are included in the License?

There is a variety of questions that need to be answered in order for the software license agreement to comprehensively describe the business relationship between the licensor and licensee. However, as previously mentioned, the scope of the software license is the key clause in the agreement taking into account that it specifies the particular rights granted to the end-user and simultaneously sets the boundaries in that term. Depending on the limitations that the licensor wants to impose on the licensee, the license can be, for example:

  • non-exclusiveor exclusive,
  • perpetualor time-limited,
  • worldwideor territory/industry limited.

This list is, however, not exhausted and can vary depending on the nature of the business relationship between you and your licensee(s). Naturally, it is essential for the software license agreement to be appropriately adapted to your particular needs, so that it is clear which rights you are (not) granting to your users, which will finally contribute to avoiding the different interpretations and potential misuses.

Software License Agreement: List of Pros

Having in mind the previously explained purpose of the license itself, it can be concluded that the main objective of the software license agreement is to specify the rights and restrictions arising out of the relationship between the licensor and licensee. However, it must not be forgotten that the primary advantage of this type of contract is the mere fact that it enables the owner of the software to “share” its software without losing control over it. Regardless of whether your software is intended for use by companies or you are targeting mainly tech-oriented individuals, the benefits of entering into a comprehensively drafted agreement with regard to the use thereof are numerous.

software license agreement

To sum up, a software licensing agreement happens to be a golden mean between securing your software and making good use of it. Just as well, this type of agreement is a very useful tool for preventing the majority of the imaginable troubles that may occur between you and the purchasers of the license to use your software, which usually arises due to the fact that not all relevant matters with regard to this business relationship have been set in place on time.

Software License Agreement vs. Terms of Use – What’s The Difference?

ugovor o licenciranju softvera

Being frequently used in a similar context, terms of use and software license agreements often are mistakenly identified as the same, although there are significant differences between these two agreements. In each particular case, you should carefully consider the needs of your business model and properly understand which of the two fits them (if not both) and when.

In other words, when it comes to comparing these two types of agreements, the question is not always “which one should I choose” but instead might be “when do I need both”?

As explained in one of our earlier texts, terms of use can be used in different contexts:

  • terms of use of website or application itself,
  • terms of use of a service provided via the website and/or application,
  • terms of purchasing a product via an e-commerce website or application.

Anyhow, when we talk about the similarities between software license agreements and terms of use, they particularly refer to the terms of use of the website via which the users can access the software – so they will be the focus of the following sections.

What Do You Actually Provide To Your Customers?

The key difference between terms of use and software license agreement is the fact that terms of use regulate the situation where the user gets access to the software through the servers of the software owner – in other words, the software is provided to the customer in a form of service. This is typical for the so-called cloud agreements, whose most famous representative is a Software-as-a-Service (SaaS) agreement. In essence, a SaaS agreement is a service agreement distinguished by its own specific terms, but its main characteristic is that it enables the user to use someone else’s software on a subscription basis. Basically, the user gets solely to use your software “from the distance”, with no right to access the software itself.

For example, users who access Netflix through a web browser, by creating an account, i.e., by subscribing, accept the terms of use of the software, which means that they enter into a SaaS Agreement with Netflix. Basically, in order to watch movies and tv shows the user needs to log in and access the website online, without installing their own copy of the software on their computer.

On the other hand, as stated earlier, the subject of the software license agreement is a particular scope of rights on the software. Therefore, by signing this type of contract with your customers, you provide them with a product instead of a service. Consequently, this leads to some additional issues which must be covered by specific rules and procedures in order to maintain the safety of your software.

On the other hand, by downloading the Facebook app the user concludes a license agreement with Meta company. In that case, although it might seem that the user has the same scope of rights as when using the web version of the same social network, there are significant differences in the rights and obligations of the provider, depending on the particular option user has chosen.

How are the bugs in the software resolved?

ugovor o licenciranju softvera

In case your software fails to comply with the specifications set in the software license agreement, you will probably have the obligation to provide some additional services including maintenance and support in order to fix the bug. In other words, the customer has the right to request from you to repair the copy of the software which you have delivered to them in accordance with the license agreement. Besides, if you decide to offer your users a newer or better version of the software, you should lay down some ground rules explaining the procedure of updating and upgrading the software.

When it comes to terms of use which regulate the provision of a certain service to the customer, every error or inconvenience will most probably trigger the provisions of a separately drafted service level agreement, which sets out your duty to keep the software running and stipulated what will happen otherwise. Given that the user does not install the software on their computer, you have no obligation to fix that particular copy of the software in the user’s possession.

What About Data Protection?

In those cases when your terms of use cover the cloud services, i.e., regulate the use of the software located on your servers, you should not forget to lay down the rules on the management of the collected data, and in particular to ensure that all the necessary measures for the protection of users’ personal data are undertaken. In such an event, you have significant responsibilities. Those issues demand less attention when you, by entering into a software license agreement, provide the software that is installed on the customers’ computers, considering that your company typically collect much less (personal) data in such a scenario.

With the previously explained differences in mind, it shouldn’t however be mistakenly understood that terms of use and software license agreement exclude each other. Quite the opposite, they often go well together: for instance, if you offer both online and downloadable versions of your software, you will certainly need to regulate the use of the downloaded software by a software license agreement, which will be an integral part of the comprehensively tailored terms of use, precisely laying down the use of the online version.

Let’s jump back, just for a second, to the example from the beginning of the text – the online version of the Microsoft Office suite is used in accordance with the terms of use – the SaaS Agreement. However, if a user decides to download the software on their computer, as well, a separate software license agreement will be concluded.

To sum up, entering into a software license agreement with your customers should be the first item on your checklist once you decide to place your new software on the market – this type of contract undebatably is one of the most convenient ways to share your breaking new idea with the world, while simultaneously establishing the adequate level of its protection.

In addition, if you adequately analyze all the potential risks at the right moment, you will be in a position to detect the potential threats and keep them from happening. Simply put – protect your software and do not risk being caught unprepared in case it is inappropriately used.

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