Software license agreements: Scope is key

The Essential Lawyer Matt Karlyn

Recently, I have received lots of calls from clients about software license agreements. Therefore, this month I am starting a three-part series on some of the more important elements of software license agreements that will help you remain in compliance and also get the protections you need. So, let's start at the beginning -- the license grant.

The license grant -- usually the first or second section of a software license agreement -- is where the vendor (the licensor) grants an individual or an entity (the licensee) permission to do something with the software (e.g., use it).

Though this may seem obvious, it is critical to make sure that the license grant aligns precisely with how your company will use the software being licensed, and also that it is broad enough to cover your company's intended and expected use. This is important because software companies can and do check on whether customers are using more of the vendor's software than they paid for. In fact, several clients recently reported to me that several software vendors have asked for software usage reports and software usage audits.

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Overuse is not uncommon. Frequently, it is the result of a misunderstanding (or miscommunication) between the software vendor and the licensee with respect to how and by whom the software will be used (though it is also frequently the result of a company's failure to keep track of the number of licenses being used). When it's a misunderstanding, it usually means the license grant was drafted inadequately.

For example, I recently reviewed a license grant that stated: "Upon Licensor's acceptance of Licensee's order, Licensee has the non-exclusive (unless otherwise specified in the purchase order), limited right to use the Software solely for Licensee's internal business purposes." This was standard boilerplate language included in a vendor's form for a very expensive, mission-critical application.

Unfortunately, this language did not adequately capture the scope of my client's intended use of the software. In fact, my client required that many of the company's third-party contractors use the software for implementation and other purposes. Thus, we revised the contract language as follows: "Licensor grants Licensee a perpetual, non-exclusive, royalty free license to use the Software for its business activities. Such business activities include, but are not limited to, the right of Licensee and its parents, and their respective affiliates, subsidiaries, subcontractors (including outsourcers), and partners to access and use the Software." The vendor ultimately accepted this expanded license without additional cost to my client.

Here are a few other things to watch out for in the license grant:

• Make sure you know the meaning and understand the limitations associated with common usage restrictions. For example, a "per seat" license generally restricts the number of named users who can use the software, a "concurrent user" license generally permits a specified number of unnamed users to use the software simultaneously, and an "enterprise" or "site" license generally permits use by an unlimited number of users at a particular site or throughout a particular company. Exercise caution, however, because the meanings of these terms may differ among software vendors.

It is critical to make sure that the license grant aligns precisely with how your company will use the software being licensed.

• Make sure you know exactly what it is your company is licensing. This means that the license grant (or another section of the software license agreement) should specifically describe the applications being licensed. If you need the source code to the software, be sure the license extends to the source code. Confirm also that the license includes any updates, modifications, enhancements, fixes, patches and any other revisions made by the software vendor to the software being licensed.

• Watch out for the license restrictions. License grants will typically contain a laundry list of what your company won't be able to do with the software being licensed. Read the restrictions carefully to ensure that they don't restrict your company from using the software as required.

In summary, review the license grant of your software license agreements carefully and ensure it aligns with the scope of your company's intended use of the software. If it doesn't, your company may fall out of compliance with the license agreement and be subject to financial (and perhaps other) risk.

Next month: The warranties every software license agreement should have.

This article is not a substitute for legal counsel. In any given situation, the impact of the law depends on many factors. The author recommends engaging legal counsel to assess your legal liability.

Matt Karlyn, J.D., M.B.A., is a member of Foley & Lardner LLP's Information Technology & Outsourcing Practice Group in Boston. Write to him at mkarlyn@foley.com.