Matt Karlyn, an associate at Foley & Lardner in an article on SearchCIO.com states that “it is critical to make sure that the license grant [in a software license agreement] aligns precisely with how your company intends to use the software being licensed.” The scope of the license grant, as Karlyn suggests, is easily one of the most important provisions in a software license agreement – for both the vendor and the licensee.
As an example of a software license grant that allows use of the software by the licensee’s third party contractors, subsidiaries and partners, Karlyn presents the following language:
“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.”
As a vendor, you should think twice before adopting similar language. First the above language allows the licensee to provide access to unidentified third parties with which the vendor has no contractual relationship. In the event of an unauthorized disclosure or use of the software by one of these third parties, the vendor has no ability enforce the license agreement against these third parties. In fact, it’s unlikely that the vendor will even know which third parties are using its software since the grant has no language obligating the licensee to identify the third parties to which it is providing access. Further, it’s unlikely that the vendor can even look to the licensee to stop the unauthorized use or access of the third parties.
Also, issues regarding indemnification, warranties and representations are not addressed. It is the licensee that is seeking an expansion of the license grant to allow third parties to access the vendor’s software. In such a case it is not unreasonable to ask the licensee to accept some responsibility for the acts of third parties it is allowing to access the software.
It is reasonable for a vendor to ask the licensee: (i) to require that each third party agree in writing to be bound by the terms of the license agreement; (ii) assist the vendor with enforcement of the license agreement against those third parties; and (iii) indemnify the vendor for any unauthorized use by third parties allowed to access the software.
The goal in any software license agreement negotiation should be to end up with a license agreement that fairly addresses the reasonable concerns of both the licensee and vendor.
As a licensee you want a software agreement that is manageable and allows you the flexibility to use the software in the way that best suits your business needs. As a vendor you want to maintain reasonable control over your intellectual property and be compensated for expanded use of that intellectual property.