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Home / Business Contracts / Software Licence Agreement

What is a software licence agreement?

A software licence agreement is a legal contract where the owner of a software product gives another person (generally called the licensee) the right to use, modify or redistribute its software product.
In return for allowing the licensee to use the software the licensee must pay for that right (the amount paid is determined or set out under the software licence agreement itself).

What IP rights will I have in Software?

When someone creates a new software product, they will generally accrue copyright in that software. Owning copyright in the software gives the software creator full control over the software product so that they can prevent others from using or distributing this software.

It is also possible (though uncommon) to obtain a patent over software. So in nearly all cases, software in Austalia is protected by copyright (and the name of the software product can be protected by a trademark).
A good example of how valuable protecting software can be is seen from the following example:

Amazon’s one-click software is a great example of the power of protecting software. Their one-click software enables customers to complete a transaction in one-click by just clicking on a product and customers do not have to complete payment details. For legal protection, Amazon patented this software invention and did not/does not allow its competitors to use this technology.

However, every business has a different strategy for what to do with their IP rights. Owners of software products sometimes want to generate income from their invention or want to have more control over who uses their product.

Software licence agreement is the instrument to achieve these purposes.

As indicated above a software licence agreement is a legal contract where the owner a software product gives the licensee the right to do certain things with the software. With this agreement, anyone who uses this software would violate the IP rights and potentially be obligated to pay for damages.

Therefore, this agreement benefits both sides: While the owner generates revenue from its invention, the licensee enjoys using the software without getting into any legal trouble.

Software licence agreements do not affect the ownership rights on the software at all. It just permits the licensee to use or distribute the software.

When do I need a software licence agreement?

You will want to put in place a software licence agreement if you want:

1. To generate revenue from your software product:

If you have spent a lot of time and money developing a new software product, licensing is a great way to try and recover some of these costs by getting paid when someone uses or resells that software.

In addition to the licensing fee your licensee pays, you can also provide software updates and maintenance services and increase your profits from your products.

2. To have more control over who uses your product and how it is used:

The main purpose of a licence is not just to be paid but also to control what or how the licensee can do with the software.

So one of the key aspects of a software licence agreement is to set out the licence rights that the licensee (the user of the software) has.
For instance, you can specify in the licence agreement:
1. how long the licence will last
2. what the licensee can do with the software
3. whether the licence agreement ends after a set period of time
4. whether you can audit the licensee’s use of the software to ensure you have been paid the proper amount
5. as well as other clauses that are relevant.

What sort of clauses should be in a software licence agreement?

1. Who are the parties

You should set out who can use the software product. For example, the licensee may have affiliate companies or a parent company who wants to use the software. Depending on the particularities of the case, you can specify who is the ‘licensee’.

2. Licence fee

Do you want to agree on a fixed yearly fee or a monthly payment? Does the licence fee include maintenance services? This is the section to decide on these matters.

3. Terms of Use

This section governs how the licensee can use your software, if they can sub-licence it or on which computers/servers they can use the software or is it cloud-based. Furthermore, you can also determine who can access to the source code.

4. Non-exclusivity

If you plan to license your software to others besides the licensee, you should add a non-exclusivity clause. Licensing your software to multiple parties will generate more income.

5. Limitation of Liability

If your software does not work properly, it may cause substantial damage. Against this risk, it is safer to include a provision to limit the amount that you would be liable for damages. This limit should be a specific dollar amount so that there is no doubt as to the amount you as the licensor (the owner of the software) are potentially liable to pay.

6. Confidentiality provisions

You may want to include confidentiality provisions so that there some or all of the information in the software licence agreement can not be disclosed to a third party.

7. Intellectual Property indemnification

Most software licences include a third party infringement clause, this is a clause that protects the licensee. It basically says that if a third party believes that the licensee’s use of the software infringes that third party’s IP rights (i.e. the third party alleges that the software is a copy of their software) then as you, the owner of the software created that software, you are responsible for protecting the licensee because you created the software (and not the licensee) and you should know if you copied the third party’s software when you created the software (hopefully not!)

See our related page: Software as a Service (SaaS).

If you have any questions about a Software Licence please feel free to get in touch.

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