Software License Agreements - The Ultimate Guide

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Although software vendors have many inherently guaranteed in many jurisdictions (such as copyright), it is important to spell out the terms in a formal agreement between you as the publisher and external parties that interact with your software. This guide should give you sufficient working knowledge to know what your License Agreement should cover, at the very least.

What is a Software License Agreement?

A software license agreement is a legal contract between the IP Holder (Author / Licensor) and the purchaser of a piece of software that establishes the purchaser's rights (Licensee). A software license agreement details how and when the software can be used and provides any restrictions that are imposed on the software. A software license agreement also defines and protects the rights of the parties involved.

What are the Main Types of Software License Agreements?

End-User License Agreement:

An end-user license agreement is a legal contract entered into between a software developer or vendor and the user of the software, often where the software has been purchased by the user from an intermediary such as a retailer.

Original Equipment Manufacturer:

An OEM license refers to the license that a manufacturer installs on new devices. If this is your case, the product key usually is not transferable, and you can't use it to activate another installation. The exception is if you're re-activating a new installation on the same computer.

Open-Source License Agreement:

An open source license agreement allows a party to utilize other people's code in their applications. There are many Open Source License Agreement types, like Apache, MIT, or GPL, which mainly distinguish varying degrees of distribution rights. You can learn more about the different types of Open Source Licenses here.

Why do you need a Software License Agreement?

As a software developer, you've almost certainly invested a significant amount of time and money in developing the software you’re licensing. You’re probably also counting on it to generate revenue for you as a result. That is where a license agreement for software comes into play.

Software license agreements are essential for five main reasons:

  1. It guards against software abuse (legally, at least)
  2. It enables you to license it rather than selling it
  3. It allows you to mitigate warranty claims
  4. It may serve to limit your liability
  5. It will enable you to discontinue unauthorized use

Does Open Source Software Require a License Agreement?

Yes, an open source license agreement is a contract that allows a party to freely utilize other people's code in their applications. These agreements are essential because, without them, anyone can use or redistribute the software freely and without permission from the copyright owner.

If someone were to develop an open source project and make it available on GitHub, others could take their code and use it without permission from the author of that work. If this were allowed, there would be no incentive for developers to create new projects since they wouldn't get credit or recognition for their work; instead, another developer could just copy the work and claim it as their own.

The MIT license is one of the most simple open source license agreements. The intent was for the text to be understandable by average users and to avoid extensive litigation, which may arise from other similar Free and Open Source Software licenses.

What are the Main Clauses in a License Agreement?

When drafting your own commercial software license agreement, there are a few main clauses you should consider including:

Exclusivity:

If you want to license your software to multiple licensees companies, you will want to make sure that the software license agreement does not leave out a clause that details that the rights are non-exclusive. This will allow you to license your software to other parties. Conversely, the agreement should specify whether the software is for exclusive use to a unique licensee.

Transferability:

As a Software Vendor, you will need to consider whether a licensee has the right to assign their license to another party. Most commercial software license agreements will not allow license transfers without consent of the licensor.

Rights:

You should detail that the rights to the software will remain your property even after the execution of the agreement. This includes the actual software, the name, the copyright, the distribution rights, and even the intellectual property rights. 

Modification:

Are licensees allowed to modify the applications, or simply run as is delivered? If you are not allowing the software to be modified in any way on the back end, you should make that clear with a clause that says so and also details what the term "modification" means for this agreement. 

Breach of contract:

You may include a clause that specifies what recourse the licensor may wish to enforce if the licensee does not respect the terms of the agreement. Common remedied might include crippling the functionality of the software, not supporting it, or possibly (for expensive enterprise software) requesting financial compensation.

Device usage:

Depending on how you license the software, you will want to include whether the licensee is allowed to use the software on one single computer or multiple computers in the same location, such as the business location. This prevents companies from taking advantage of your software and trying to get more for the price they paid. 

Limitation of liability:

This will detail the fact that the licensee will be accepting the software as is, will not be able to sue for damages, and what warranty you care to for the software and its usage, if any.

Terms of termination:

In case you ever do need to terminate the agreement, this clause will detail the actions that must be taken by the licensee. Sometimes a license agreement has a fixed duration (such as a timed-trial license), and other times, it's perpetual. Will likely want to include which breaches of the agreement are grounds for termination of the agreement. Some Licensors sometimes reserve the right to terminate a license agreement without cause with or without a notice period.

Governing law:

This section will detail the governing law for settling any disputes. You will want to make sure that this is set for your state and jurisdiction.