The Importance of Licence Grants
Software licensing expert, Lora Valtcheva, explains the various types of licence grant and what you should look out for when negotiating licence grant language in a software licensing agreement. Lora also covers the risks involved in sub-licensing and why you should avoid this.
The licence grant language in a software licensing agreement is one of the three key things when it comes to software licence audits and compliance issues. It is absolutely crucial that the licence grant is accurately defined and covers the customer’s usage of the product.
Why Should We Care So Much About Licence Grants?
The most fundamental aspect of any licensing agreement is the licence grant. When you sign a software agreement you don’t get a product, you get a right of use over that product. Even if you receive the software on a physical installation disk, it should not be seen as a product in the way any old widget is. It should be understood to be a right of use over that software product. Somewhere in the licensing agreement (whether this is a signed document or “click wrap” licensing terms) there will be contractual language governing how you may use the software product. As a customer, having purchased this licence, you have the right to use the software, but only in a certain way or for a particular purpose. ose.
Definition of a software licence from wikipedia:
“A software license is a legal instrument (usually by way of contract law, with or without printed material) governing the use or redistribution of software.”
Don’t Confuse Buying With Licensing
A mistake lots of people make when “buying” software, is that they get focused on the product: what functionality does it have, what can it do for us as an organisation etc. Whilst it is obviously good to think about these things, don’t get distracted from what it is you are actually buying. Because you are not buying a product, you are licensing software. You are paying for a “right to use” – the concept of ownership should not come into your mind.
The problem is that people generally experience rights of use in only a very few limited circumstances in their lives. Most of us, when we pay money for something, we then get the thing and can do whatever we want with it. However, try buying a book, scanning all the pages as a PDF and publishing it on internet. You will very quickly have the author, or the author’s publisher, threatening legal action for infringing their copyright.
The same is true of software. As the picture to this blog post shows, don’t think of software as a product, think of it as something more akin to a parking permit.
Consider The Use You Will Need To Make Of The Software Product
Before you pay any money to the software vendor, think about what you will need to do with the software product. Whatever you need to do with that software should be covered in the description of the licence grant in the software licensing agreement.
Some useful questions to ask yourself before licensing software:
- How long will the software product be used for?
- Where will the software product be used – in which geographic area?
- Will the software product be used for internal purposes, or will it be used to provide services to your clients?
- Will you need to modify the software product? If so, to what extent? Will it simply be customisations? Or will your organisation actually modify the software code.
Licence Metrics In As Part Of The Licence Grant
The next important question to consider is: how is the software vendor proposing to measure the usage of the software? And will you be able to actually measure the usage of the software product in the way the software vendor is suggesting?
Software vendors are typically very helpful in assisting their customers to describe all these things correctly in the contract – NOT!! (Lora laughs from over a decade’s experience in dealing with the unhelpfulness of software vendors when it comes to properly defining licence metrics)
In fact software vendors like nothing more than to sell you a software licence with a particular scope – assuring you verbally that the written description in the licence grant covers your usage – and then come back a year later to tell you that the way you are using the software is not within the terms of your licence grant language. So, guess what, you need to pay more.
Lora says: “Software vendors will sell you usage rights you don’t need and restrict the rights you do need”.
So let’s look at some typical licence grant language:
“Licensor grants to Licensee a non-exclusive, non-transferable, royalty-free, fully-paid up right and license to:(i) use, copy, modify, reproduce and have reproduced…”
What do some of these words mean:
- “non-exclusive” – don’t be worried about this term. It simply means that you will not be the only customer using that software. Exclusivity is rare. When we are talking about off-the-shelf software products, all vendors include the term “non-exclusive” in the licence grant. This is not a cause for concern for you as the customer.
- “non-transferable” – this means that you cannot pass the licence on to a third party. There are plenty of instances where you might want to do this, so consider in which circumstances you might need to transfer the licence and get an exception for those situations in the licensing agreement. This might include transferring the licence to a customer at the end of your agreement with that customer, it might include transferring the licence as part of a divestiture of one of your business divisions. Without explicit language in your licensing agreement allowing you to transfer the licence, software vendors will want to make money from any such transfer. The European courts have recently weakened this contractual language by allowing the sale of second-hand perpetual licences which were first purchased within the European Economic Area.
- “royalty-free” – simply means that each individual use of the software product does not require a royalty payment to the software publisher.
Term vs Perpetual Licence Grants
A perpetual licence involves an upfront investment (typically between 3 – 5 years of what an equivalent term licence would cost). On top of that up front fee, the customer pays maintenance and support at between 18% and 23% of the licence fee. A point you should always clarify in your software licence agreement when it involves perpetual licences is that the percentage you pay as a maintenance and support payment should be based on the net (or discounted) licence fee, and not the list price of the licence.
A perpetual licence is a licence to use the product in perpetuity. So when you have a perpetual software licence you can use the product for ever and ever without having to pay any additional fees to the software vendor, as long as you use the same version of the software as you were provided when you first licensed the software product. If you want to get access to new versions, updates, patches and bug fixes, then you need to pay maintenance on your perpetual licence.
Maintenance Is Really An Augmentation Of The Licence Grant
People tend to think of that as a service that you buy. When you talk about getting your car maintained, you are generally talking about a service. However, when you buy software maintenance, this is NOT a service; it is an addition to your existing licence right. It augments your original licence giving you the right to all the additional intellectual property released by the software vendor until the end of the maintenance period.
So when the software vendor comes out with improvements to the product or bug fixes or whatever, that is covered under the maintenance payment. If you stop paying maintenance, you still have the right to use the product, but you don’t have the right to the new versions, updates, patches and bug fixes.
Because maintenance and support are generally bundled together (and it is almost always impossible to get the software vendor to unbundle them) we often confuse the terms. For example, running software “unsupported” generally means that, not only will you be refused support if you call the software vendor, but you also do not get access to any new intellectual property the software vendor releases.
The Major Advantage Of Perpetual Licences
When you have a perpetual licence, you are far more secure in your right to use the product. If the software vendor is messing you around at the end of a maintenance and support term and you cannot reach an agreement, you can always revert to using the product without maintenance and support. They see their revenue stream drying up instantly and that is a very good lever to negotiating better terms. Be careful that you do not give up your perpetual licences without careful consideration of the consequences.
Before buying perpetual licences, consider how long are you will be using the product and how “locked-in” you will be to the vendor’s software.
Territory Restrictions In A Software Licence Grant
Lora advises that territory is important for two reasons: firstly, in your right to use the software from a particular geographic location, and, secondly, you should be careful that a limitation of the territory might also limit the intellectual property indemnification. (see an extensive discussion on IP indemnification language in software agreements in podcast episode 7).
This is especially important to pay attention to as the territory is often defined in the definitions section which can be easily overlooked.
Avoid Sub-licensing Software
Transferring the software (as described above) is when you transfer the entire scope of the licence including all rights and responsibilities. As Lora says: “you just get rid of it and forget about it”.
Sub-licensing on the other hand is different from transferring. You sub-license all or part of your right to use the software to someone else. However, you remain liable under your licence agreement with the software vendor. You are therefore responsible for how the sub-licensee uses the software product.
Lora’s advice is: NEVER DO SUB-LICENSING… you don’t want to be responsible for someone else’s usage of the software product.
If another party needs to use the software product then they should go to the software publisher and buy a licence. Do not sub-license it to them as you may get into difficulty. Don’t mix these two licensing methods up!
Questions To Ask Yourself When Defining The Licence Grant
Lora advises to think about the following points when defining the licence grant in a software licensing agreement:
- do I need only to use the software product, or do I need only to distribute or both distribute and use?
- do I need to modify or customise the software product?
- do I need to transfer or sub-license the licence?
- do I need only to evaluate the software product?
The scope of the licence grant should cover all of these points. The extent of the scope will have a big impact on the price you pay. A simple right to evaluate the software should be free of charge. In the same way as you would not pay to take a car out on a test drive if you are thinking of buying a new car, you should not have to pay to evaluate a software product.
Similarly, a simple right to use will be cheaper than a right to use the software to provide services to customers. The latter would have revenue generating value to your company and may form part of your unique selling proposition as a service provider. The former would not, and is therefore less valuable to you resulting in a smaller price tag.
Parting advice from Lora: “when it comes to licence grants: don’t buy licence rights that you don’t need, or buy licence rights that are not sufficient”.
Image credit: “Permit Holders Only” by Elliott Brown, Creative Commons, Flickr.com