2005: Volume 2
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How to Read and Understand the Software License Agreement
Part 2
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This is the second part of a series, which will dissect and discuss the various sections and terms found in software license agreements.
How often is a software license agreement 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. The buyer generally assumes that the agreement must be signed “as is” to obtain use of the software, or else the buyer considers the agreement not really important. Other than mass-marketed software, software licenses for substantial software acquisitions are generally both negotiable and very important. Software license agreements are not written to be fair to buyers. Contract terms, even those usually considered unimportant, can very suddenly become very important. This series of articles is intended provide a guide to understanding the license agreement terms before signing on the dotted line.
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Depending on the drafting style of the agreement, the first substantive clause in the agreement is likely to be the definition section or the actual grant of license. This article will examine both sections.
Definitions. A definition section does not appear in all license agreements, but it should. The definition section is used for two purposes. First, as expected, it will provide a “one stop” location to find the meaning of any unclear terms. More importantly, it can be used to change the meanings of words that normally will have a different meaning.
Defining the meaning of unclear terms is no small matter. Overwhelmingly, disputes over agreements which result in litigation are mostly due to disputes which may have been avoided if simple terms had been clarified. Clauses which fail to define simple terms, such as “calendar year” or “one year from signing the agreement,” can later be the cause of major disputes. Issues, which would have been unimportant and simple to solve before the agreement was signed, should not become the basis of costly and avoidable litigation.
More importantly, the definition section can be used to alter the ordinary meanings of words and terms, as they apply to the agreement. It should not be assumed that the definition of a term matches the ordinary understanding of the term. This is a trap for the unwary. In this manner the author of the agreement can obtain the other party’s assent to terms which would otherwise have been the cause of extended and perhaps contentious negotiations.
An agreement in which commission payments are based on “net revenue,” is not uncommon. However, if the definition of “net revenue” is “Revenue remaining after payment of the cost of operations, taxes and marketing,” it is likely that little or no commission will ever be paid. In some circles this is referred to as a “Hollywood” contract. The most famous example is the movie Gone With The Wind, which, under certain definitions in the original production agreements, has yet to break even.
The definitions must be reviewed with specific reference to how the terms are used elsewhere in the contract. Any term which is included in the definition section will be used elsewhere in the agreement. If it is not used later in the agreement it should be removed. There is no reason to have definitions of terms not included in the agreement. This can happen, especially with form agreements. Having definitions of terms not in the agreement can lead to confusion and misunderstanding.
Any term which is altered, either from its customary and ordinary meaning, or which creates a meaning different from a party’s understanding of the term, should be carefully reviewed to determine what effect the definition has on the balance of the agreement. If the contractual definition is adverse, the definition must be placed on the negotiating table. If it is not, the altered definition will be the one used by a court, not the ordinary definition.
The Grant of License. One of the few sections of the software license which everyone reads is the grant of license. The grant of license is the provision which directs how the licensed product may be used. However, reading and understanding the grant of license are different. The usual terminology could be something like:
Licensor hereby grants Licensee a perpetual, non-transferable, non-exclusive license to use the software in Licensee’s business.
This would be followed by further limitations regarding use of the licensed product, such as restrictions on copying, use by subsidiaries, restrictions on the numbers of permitted users, and so forth.
The main grant of license usually includes several terms, which need to be understood. “Perpetual” would appear to mean without end. However, “perpetual” may not truly be without end as the word is commonly understood. If the license agreement can be terminated for cause, such as for breach of the agreement or failure to make a payment, the perpetual license may terminate with the agreement.
“Non-transferable” means that the license cannot be transferred from the Licensee to any other party. A license is transferable if it is not limited by the agreement. If the license is “non-transferable,” the license cannot even be transferred to a purchaser of all of Licensee’s assets, unless there is a specific provision which permits the transfer.
“Non-exclusive” means that the software will be licensed to others. Normally, that is to be expected. However, if the Licensee has had the software custom or semi-custom created, the Licensee may not want a competitor to be able to use the software, which was created to obtain a competitive advantage.
There are numerous versions and variations of license grant. It is necessary to have advice of a person knowledgeable in licensing to assure that the grant of license meets the needs of both parties.
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