What is a Software License Agreement?
A Software License Agreement is a legally binding control to terms that governs the use and redistribution of software. These agreements are advantageous for both the software manufacturer and the consumer as it allows the consumer to use the software as their own while the manufacturer maintains the right to control how it is used and distributed. These license agreements control functionality, the nature and purpose of the software, and limits what you may do with it.
It is essentially an agreement between the purchaser/consumer and the manufacturer that states the terms and conditions of use. A software license agreement determines how many people within a business or company can use the software and how many times that software can be utilized at once.
Software license agreements can be explicit or implicit. Explicit agreements define the specific limitations of a person’s access to the software , while implicit agreements have set limitations of access.
Licenses also allow the manufacturer to restrict certain portions of their code or source code. There are three general types of software licenses: Proprietary Licenses, Freeware Licenses, and Open-Source Licenses. Proprietary Licenses are when consumers purchase the software with a limited license to use the software they purchase as well as all updates to the software.
Freeware Licenses allows consumers to get a free copy of the software, but with the understanding that the manufacturer can incorporate ads or have the consumers endure minimal costs to use the system.
With Open-Source Licenses, the manufacturer provides the source code to the software, allowing the customer to modify the program as they choose.
Causes for Termination
Termination of a software license agreement can occur for various reasons. These include breach of contract, expiration, changes in business needs, or mutual agreement.
According to § 12.3 of the UCC, parties can mutually agree to the terms of a software license and then terminate that agreement: "A term providing that one party or parties may cancel or withhold or pay less than the agreed price only in the event of some breach or other occurrence may be included in the contract."
Parties can also give notice of termination when the time period for which the software license agreement is supposed to be in effect expires. For instance, a time-limited software license agreement can be described as follows: "This license has an initial duration of five years…"
There are also circumstances in which a software license agreement will automatically terminate if certain conduct occurs. For example, intellectual property rights might require a company to stop doing business as soon as it’s discovered that the company is infringing on someone else’s intellectual property rights.
However, most software license agreements will contain a provision, usually in the "termination" section or in a section titled "breach" or "termination," that precludes the termination of the software license agreement without notice. It may be written in a variety of different ways, but the basic premise is that the company anticipating termination has to be given notice and a brief amount of time to cure whatever problem arose.
One common clause is identical to § 12.3 of the UCC: "A requirement that one party or the parties reserve the right to cancel or withhold or pay at a different rate, or the requirement that there be a different remedy in the event of a breach or occurrence, may be included in the agreement."
However, this type of contractual provision is regularly worded to say that a software license agreement can’t be terminated for any reason, or at least not without notice and a 30-day opportunity to "cure" the problem. This means that the software licensing agreement can’t be terminated if someone was late in making payments for software licenses, or if some other incidental obligation was breached; the company simply has to be given notice that something wasn’t performed and a chance to perform it.
Furthering these ideas, it’s common to see language granting one party or the parties the right to cancel only if the other parties fail to abide by the software license agreement.
In the arbitration clause, it’s possible to waive the right to terminate the software license agreement by opting for binding arbitration. This is often included in the "termination" section. If the arbitration clause is precluded, the purpose to which the software license agreement was intended will happen and the software license agreement as a whole will likely still be valid.
Provisions Regarding Termination in the Agreement
Contracts often contain a provision known as a termination clause, which outlines the parameters surrounding an early termination. In Massachusetts, when no specific term is stated, the law provides for a one-year notice requirement in order to effectuate a non-renewal of a contract. Standard termination clauses are commonly found in software license agreements and generally outline the conditions under which a terminated party can terminate the agreement. The termination clause also typically describes any remaining obligations, including with regard to payment of licensing fees and other outstanding charges, upon early termination as well as the effect of termination on the continued licensing of the software and other intellectual property rights.
The Legal Effects of Termination
Termination of a software license agreement may have legal and financial implications depending on the severity of the conduct, the type of licences involved and applicable industry codes. Simply put, it is important to know whether bad behaviour is likely to cause a termination or not.
In the absence of an ongoing fresh breach of contract, generally if a licensee continues to use licensed software after expiry or after notice of termination of the licence, it will be liable for breach of contract. However, where the software is embedded in the licensee’s technology as part of an integrated software solution, it may not be feasible to cease operation of the software upon termination. In the latter case any liability may be limited to (for example) the value of the copy of the software.
It is also important to be aware that the party who terminates the agreement must be actually entitled to terminate. This is not always straightforward. If a party does not have sufficient grounds to terminate the agreement, and purports to terminate it, the termination could potentially become an actionable breach of contract. In other words , the adverse party who is not entitled to terminate the agreement could be liable in damages for what might otherwise have been a lawful termination.
In many enterprise license agreements the right to terminate belongs to a third party who is often a larger customer. Unless the licensee has the consent of that customer, any termination by the licensee may result in a breach of contract actionable by the customer. Not all terminations by an agency of the government, such as where the contract is effectively terminated under legislation or by decision of parliament, will necessarily be actionable by the supplier. It will depend on the specific context and content of the legislation and the supplier’s agreement with the agency.
The rights of parties and any potential liability of the licensor to the licensee or vice versa upon termination will depend on the exact provisions of the software license agreement. The licensee may be obliged to return the copy of the software to the licensor upon termination whereas the licensor’s entitlement to retain any amounts paid by the licensee upon termination will normally be regulated by the agreement.
Guidelines for Handling Termination
The termination process is rarely smooth, and to ensure a successful transition Plan 2 (x,y,z) are recommended: Plan 1 – Plan the transition well in advance to avoid confusion, and permit time for negotiation. The disruption can potentially be minimized by adequate planning. A schedule should be established with appropriate milestones stipulated in the migration plan. Engagements, particularly for utilities, should consider the scope and phrasing of the contract, and benchmarking should be considered to ensure that pricing is fair. Plan 2 – Obtain assistance from legal professionals. Early legal engagement, perhaps even at the planning stage, can be extremely beneficial in effecting an appropriate exit strategy with the licensee and helping to protect IP rights. Suitable professionals will ensure that termination clauses are reviewed as early as possible so that contract disputes are avoided. Disagreements are more prevalent where provisions are vague. It is important to note the notice period, termination events and post termination obligations. Likewise, consideration should be given to payment of royalties for any rights retained by the licensee. Plan 3 – Communication with all stakeholders at a suitably early stage is essential to ensure a smooth exit. Openness and good communication helps to ensure that all parties have clarity. Business directors should give personal attention to the process if it needs top level support. It is also essential that external communications do not cause distress or result in adverse publicity. The importance of having a skilled project manager in place cannot be overstated. This should involve having a dedicated resource from both parties: the licensor and the licensee.
Case Studies and Illustrations
Plaintiff in a 2015 case was a fitness software company. The defendant was a large health club chain. Plaintiff alleged that defendant was effectively terminating the agreement without termination. Plaintiff alleged negligence, intentional interference with contract, and other claims against the defendant. Plaintiff sought damages for projected profits it would have made as a result of its software’s use in the defendant chain’s new locations. The US District Court for the District of Utah dismissed the final remaining claim against defendant, which had been for intentional interference with prospective advantage. The remaining claims were evaluated by the US Court of Appeals for the Tenth Circuit. The appeals court reversed. The court held that simply because the defendant had merely stopped employing the software doesn’t that the defendant had terminated the agreement, whichever party had the right to terminate the agreement. The appeals court asked just what benefit could there possibly be in finding that the defendant had terminated the agreement when in all events the contract gives either party the right to terminate the agreement. The appeals court thus agreed with the plaintiff that the defendant effectively terminated the agreement as a whole , whether or not it notified the plaintiff.
An Ohio court held that a licensee seeking to terminate a software license agreement need not provide a complete statement of the reasons nor must it be certain that it has made a miscalculation. An Ohio state court ruled that a licensee was entitled to $1 million in compensatory damages as a result of a software license agreement that was wrongfully terminated by its licensor. The court held that a software licensee was required to know for its purposes the software that it had licensed and as such it was not required to provide a written notice of termination that would be allowed under any contract of sale to the goods or services obtained by the licensee.
In another case a subscriber to an online service obtained access to that service via multiple logins. The master license agreement said that the instance level detail became subject to an additional license fee. The government courts held that the additional license fee did not require any additional consent from the parties. The subscribers are not entitled to seek non monetary damages for failure to give or deliver any notice of the alleged termination in this case.