January/February 2005
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The Software License Agreement
How to Read and Understand the License You Sign
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This is the first part of a series, which will dissect and discuss the various terms found in software license agreements.
How often is a software license signed without being read or, if it is read, without understanding or even caring what the license means. In most cases, a license agreement is simply signed by the buyer. It is generally assumed that the agreement must be signed “as is” to obtain use of the software or it is considered not really important. Other than mass-marketed software, software licenses for substantial software acquisitions are generally both negotiable and very important. The software license agreement is not written to be fair to the buyer. Contract terms, even those usually considered unimportant, can very suddenly become very important.
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Knowing the names of the parties to a license agreement is so basic that it should not require discussion. However, it is an issue that can be more important than most people realize and is almost always overlooked, because it seems so obvious. If the end-user is acquiring a software license directly from the software manufacturer, the manufacturer’s name should appear on the agreement, making the manufacturer responsible for fulfilling the requirements of the software license.
It is not uncommon, however, for the software manufacturer to work through a distribution company, a subsidiary or other third party, which actually signs the license agreement, in place of the manufacturer-owner. Often, the very reason that the owner of the software has created such a company is the same reason that the buyer wants the actual manufacturer to sign the agreement.
Often the distributor or subsidiary has little or no financial substance. The subsidiary will sign a Software Distribution License with the parent manufacturer. The license will provide that most of the license fees, other than those needed for direct operations of the subsidiary, are paid directly back to the parent. In that way, the subsidiary will never acquire accumulated assets, in case it is ever found liable in any legal action.
The purpose of using a subsidiary is often to protect the parent company from financial accountability, in case something turns out to be wrong with the software. The licensing company will have little or no accumulated assets, since all profits, other than those necessary for operations, are paid to the parent company. Yet it is the subsidiary that signed the license agreement, so that it would be the subsidiary that would be directly liable if something does go wrong. Often, the name of the subsidiary and the name of the parent will be very similar, making it easy for the unwary to miss the difference. “Ace Software Co.” and “Ace Software, LLC.” Would be different entities.
Should it appear that the manufacturer is not a signatory on the license agreement, the purchaser should demand that the manufacturer be made an added signatory. If there is resistance to the manufacturer signing, ask further questions, including questions about the financial stability of the subsidiary and the insurance coverage available. If nothing else, finding that the company signing is not the principal owner or company with which the end-user has been negotiating should raise red flags and make the negotiators exercise caution, before entering into the license agreement.
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