What is a software licence agreement?

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A software licence agreement (SLA) is a contract where one party (Licensor) grants to another party (Licensee) the right to use the defined software.  It is often used by software developers (Developers) so that they can build and own a core application, customise it for particular clients and provide them with a licence to use the core.  In many cases this licence has been the start of a substantial business enterprise.  The term Software Licence Agreement can apply to both installed software as well as cloud based applications.  That said cloud based Apps are commonly referred to as “Software as a service contracts” or SaaS Contracts because they involve the right to access and use a software application as opposed to a right to reproduce the code.

The clauses required to be included in a SLA will depend on the nature of the software itself and the business model of the developer.   SLAs are also commonly called “End User Licence Agreements” or EULAs (EULA).

Common clauses in SLAs

The contents of a SLA will vary according to the nature of the App that is licenced, what it is used for as well as the amount and extent of support that is required.   Common clauses in SLAs include:

• Licence fee – Licence fees vary depending on the business model which may be subscription based or, less commonly, a once off licence fee for the life of the version of the software (Perpetual Licence).
• Master licence rights – If the Licensee can sublicense the software perhaps they also have ‘master license rights’ allowing them to use it to create and subsequently sublicence bespoke versions – almost anything is possible.
• Free trials – Commonly software providers are offering free trials of the software to prospective Licensee’s. Care must be taken to ensure the terms of these free trials are express.  Commonly the agreement will detail what happens to data which is entered into the trial version of the software.  It may or may not be retained when moving to a paid version.
• Support – Rights to access various types of support and the rights to access it and how it is paid for.
• Term and termination – The Licence would need to include provisions which detail when the software licence comes into effect (Commencement Date) and the circumstances which give rise to it ending.
• Renewal – If the software is licenced for a period of time (Term) then it is usual to include provisions surrounding renewal of a further term including provisions for automatic renewal.
• Intellectual property – Intellectual property (IP) clauses are usually substantial and significant in SLAs.  They may protect and grant rights to both the Licensor and the Licensee. Clauses relating to IP may set out the conditions upon which the software can be copied, grant the Licensor rights to use the Licensee’s user generated content for example.
• Reverse engineering – It’s usual for Developers to attempt to contractually protect the IP in the software by including clauses to prohibit reverse engineering.  These need to be carefully drafted to ensure that they are enforceable.
• Transaction Out of Data – The circumstances where data is transportable (or exportable) from an App and the assistance that the Licensor must provide to the Licensee are usual considerations to include in a SLA.
• Confidential Information – The nature of the software may give rise to an obligation of confidence that either the Licensor or the Licensee may wish to protect.  If this is the case then clauses will need to be included that address the contractual obligation of confidence.
• Indemnity – The Licensor may want to be indemnified against certain losses caused by the Licensee’s use of the software.   Non-payment is a usual one as is misuse of the software in a way that it was not intended or in a way that causes loss to the Licensor.   Because each Software Application is different, the indemnities should be tailored to the needs of the Licensor.   For example, an indemnity may be drafted that requires a Licensee to pay the Licensor’s losses if the software is used in contravention of spam laws.  Such an indemnity would only apply if the software included features allowing the Licensee to send emails.
• Warranties – The Licensor would usually warrant the software is free from material defects and is fit for purpose.  These are of course required under the Australian Consumer Law.   Again the specific warranties that could be included will depend on the nature of the software that is licensed.
• Limitation of liability – It would be unusual for a SLA not to include a limitation of liability clause.  A SLA may (or may not be) a consumer contract for the purposes of section 23(3) of Schedule 2 of the Competition and Consumer Act 2010 (Cth) so the way that the Developer’s liability applies may change.
• Data sovereignty – With more and more personal information data being stored, collected or distributed by software, the provisions of the entities privacy policy are almost always imported into the licence.
• Legislative compliance – Regardless of what the software does we live in a highly regulated economy.  The terms of a SLA must be compliant with various pieces of legislation that cannot be avoided.

Common legal issues with SLAs

Every SLA is (or should be) as different as the software that is licenced.  Common problems faced by Developers at the early stage of commercialisation of their Software is that they are pressured by an initial client to assign the IP in their software as opposed to licensing it to them.  It’s common for early adopters of software to receive generic templates that clearly don’t apply because of the nature of the software licenced.  Rarely can one licence be applied to another piece of software without substantial alteration.  In most cases it takes longer to ‘fix’ an agreement like this than it does to draft one from scratch.  Worse still, in trying to cut corners, Developers may elect to rely on SLAs developed by US software companies which are typically incompatible with the Australian Law.  Most people don’t appreciate the effort that is required to draft a solid SLA and that despite it appearing on the internet the copyright in it belongs to someone else!

The tyranny of the ‘perpetual licence’

In recent years one issue facing Developers has been the “tyranny of the perpetual licence”.  The Developer’s clients have ‘purchased’ a perpetual licence for the software, but the Developer no longer want to support it because of the passage of time.  Upgrading those on perpetual licences using old technology needs to be considered carefully to avoid complaints and potential breach of contracts.  Issues such as how long the Developer has to maintain backwards compatibility and interoperability with old operating systems are issues that need careful consideration.

If you want to avoid common problems like these, you should engage a specialist technology lawyer to draft your SLA.

Takeaways

Legal disputes over software licences are common.  With a well drafted SLA you can both protect the intellectual property in the software and avoid costly disputes where the terms of the agreement are uncertain or have been breached.

Links and further references

Cases

CA Inc v ISI Pty Ltd [2012] FCA 35

Legislation

Copyright Act 1968 (Cth)

Further information about software licence agreements

If you need assistance drafting a Software Licence Agreement or enforcing its terms, please telephone me for an obligation free and confidential discussion.

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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