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Software Licences

EM Law are experts in drafting, negotiating and advising clients on software licences. Our lead software licence lawyer is Neil Williamson who has extensive experience in advising clients on a wide range of software and technology law matters.

Software purchased as a package on its own will normally be purchased on the supplier’s standard terms, with or without amendment depending on the respective bargaining strengths of the parties.

What is essentially package software may sometimes be “customised” (that is, adapted) to a greater or lesser extent in order to meet the customer’s specific requirements. Again, the software will generally be licensed on the supplier’s standard terms but, because the software has been customised, and the supplier will therefore be charging more for it, those terms are more likely to be the subject of negotiation.

Software Licences: Permitted use

Suppliers will generally only be prepared to grant licences of package software on non-exclusive terms.

The supplier should also consider whether to restrict the use of the software in certain ways, for example, by reference to:

  • The identity of the customer or a group of users within the customer.
  • The identity of the machine on which the software is loaded.
  • The geographical location of the machine on which the software is loaded.
  • The purpose for which the software is used.
  • The number of concurrent users of the software.
  • The volume of processing handled by the software.

The type of restrictions will depend on the nature of the software and the manner in which the supplier typically licenses its software programs. The customer should ensure that any such restrictions are acceptable taking into account its current and future business requirements, since use of the software in breach of such restrictions will constitute a breach of the licence and may entitle the supplier to damages and/or termination.

The supplier will often wish to ensure that use of the software is restricted to the company with which it is contracting. Typically, this is achieved by prohibiting sub-licensing and assignment under the licence. For the customer, this can cause problems in the case of groups of companies. Software that is licensed in the name of one group company may well be accessed by another group company, either as a result of inadvertence or as a consequence of an organisational change. Such access may constitute a breach of the licence unless the licence permits use among group companies.

Similarly, if outsourcing is contemplated by the customer, the software may need to be used by, or assigned to, the external service provider. If such use or assignment is not permitted by the terms of the licence, then the supplier may charge a significant fee for agreeing a change of use.

Finally, wherever possible the customer should seek rights to amend, repair, update or develop the software itself, and to permit its consultants and agents to do so on its behalf.

From the supplier’s perspective, it is difficult to police the use of the software (to ensure, for example, that no illegal copying is taking place), and enforce the terms of the licence, against unconnected third parties. In order to ensure that the customer remains within the terms of the licence throughout its term, the licence could include an obligation on the customer to inform the supplier where there is any change in use of the software and a right for the supplier to audit the use of the software remotely or by entry to all premises on which the software is used. Further, certain terms may be included in the licence to protect the supplier in the event that it was willing to agree to use of the software by third parties. For example, it could grant the customer the right to sub-license the use of the software and impose an obligation on the customer to ensure that the terms of the sub-licence mirror those of the head licence (the supplier could even reserve the right to approve sub-licences in advance) and include a term to the effect that the customer remains responsible for compliance with the terms of the sub-licence by third parties (this could be given in the form of an indemnity in favour of the supplier). Any extra work involved (for example, in terms of administration or in policing the use of the software) could be reflected in the licence fees.

Clear drafting of licence scope is key.

Software Licences: Acts specifically permitted

Standard terms for package software will normally restrict the licence to use of the software and will expressly prohibit the customer from copying, modifying, adapting or decompiling it. This is because suppliers are naturally concerned to prevent their customers from interfering with the software that constitutes their means of livelihood, if only because such interference increases the risk of illegal copying of the software.

However, there may be occasions when access to the inner workings of the software is required by the customer. This could occur where the software requires maintenance or amendment, for example, in order to deal with the introduction of the euro.

In recognition of this, Directive 91/250/EEC on the legal protection of computer programs was introduced (and was implemented in the UK by means of amendments to the Copyright, Designs and Patents Act 1988 (CDPA).

The following rights are conferred on software licensees:

  • The right to decompile (or effectively reverse-engineer) a program if, broadly, it is necessary in order to operate the program with another program. This right cannot be excluded by contract (section 50B, CDPA).
  • The right to make a back-up copy of a program if necessary (as opposed to prudent) for its lawful use. Again, this right cannot be excluded by contract (section 50A, CDPA).
  • The right to copy or adapt the program if necessary for its lawful use (section 50C, CDPA). This gives a limited right to correct errors but can be excluded by an express provision in the licence, and frequently is where the supplier is seeking to sell maintenance and support.
  • The right to observe, study or test the functioning of a computer program in order to determine the ideas and principles which underlie (section 50BA, CDPA). This right cannot be excluded by contract.

However, even where these rights cannot be excluded, they are generally regarded as unsatisfactory because they are limited in their expression and untested by the courts. For example, establishing what is a “necessary” back-up copy is not easy, and will depend on the particular circumstances of the customer.

Further, there is an exception to the decompilation right which provides that decompilation of licensed software can be prevented if the supplier makes the information necessary to achieve interoperability readily available to the customer (section 50B(3), CDPA). Suppliers may take advantage of this exception by providing in their licences that this information will be made available on request to customers who wish to exercise their legal rights to decompile. In this way, access to valuable source code is kept to a minimum.

Most standard software licences include a right for the customer to make back-up copies which are necessary for its lawful use, reflecting the terms of the CDPA. However, as indicated above, for the customer, it will not always be clear what is “necessary” in these circumstances. A back-up copy which is simply stored on disk and only used if the original copy is corrupted or destroyed is arguably “necessary”, but making a second copy of the software and running it on a second computer requires specific consent.

Software Licences: Duration

Whether the term of the licence should be indefinite (that is, for the full period of the copyright in the software) or for a fixed period will depend on the nature of the software and the supplier’s licensing practice. Consumer package software normally comes with a licence that is unlimited in time. More expensive business software may be licensed for a shorter period. Due to the pace of technology and rapid changes in business practice, suppliers often need to be able to recoup their investment in the development of complex software over short periods and want to be able to re-negotiate licences for significantly improved technology. In practice, the non-availability of maintenance for software which is getting long in the tooth is normally a greater incentive to replace it than the expiry of the licence period.

Software Licences: Installation and testing

In the case of expensive package business software, especially where some customisation is to be performed by the supplier, the supplier may install the software on the customer’s system. Where the supplier agrees to provide installation services (and/or configuration services), the fees for doing so may be reflected in the licence fees or dealt with as a one-off charge.

Where any installation is performed by the supplier, the supplier will normally conduct acceptance testing to ensure that the installed software appears to be working. In most cases, these tests will not be extensive and the customer’s main remedy for failure will be to exercise its rights under the warranty given by the supplier. This will normally extend for a few weeks or months after installation. (This is also the position where the customer installs the software itself.)

However, where the supplier has carried out a significant amount of customisation or configuration, the customer may require the supplier to carry out more formal acceptance tests before accepting delivery of the software. From the customer’s point of view, successful completion of these tests should be a condition of payment of a retained proportion of the licence fee.

Software Licences: Payment

Provision for payment will vary according to the type of licence:

  • In the simplest case, such as a sale of package consumer software, there is a one-off licence fee payable at commencement.
  • In other cases, such as the sale of package business software, there is also usually an initial fee but, unlike consumer software, there will often be a recurrent annual fee as well.

Software Licences: Warranties

A supplier of package software is normally expected to provide the following warranties as a minimum:

  • An undertaking to repair or replace defective software, if the defect is notified within a matter of days after delivery.
  • A warranty that it has the right to grant the licence.

Software Licences: Limitation of liability

As the value of the software in the customer’s business, and hence the potential damage which the customer may suffer if the software fails, may far exceed the cost of the software, the supplier should always endeavour to restrict his liability to the customer under the licence. However, the law protects the customer in a number of ways. The liability provisions are often the most contentious and heavily negotiated terms in a software licence.

Software Licences: Intellectual property and indemnities

A software supplier will normally warrant that it has authority to grant the licence in question. However, the customer should, in addition, require protection against third-party claims that might hinder or prevent its use of the software. The most likely type of claim is that the software infringes a third party’s intellectual property rights. This may arise where, for example, some part of the program was written for the supplier by an ex-employee of the claimant, allegedly using code or design principles belonging to the claimant. The customer should seek protection in the form of an indemnity.

Software Licences: Termination and remedies

Termination provisions vary according to the nature of the software that is licensed.

Package software for consumer use

A supplier of package software often reserves the right to terminate for breach or material breach, although the right is only likely to be exercised in practice if the customer is found in possession of unauthorised copies of the program.

Package software for business use

Licences of more expensive business software normally contain provisions allowing either party to terminate for material breach or insolvency. Where payment for the software is made on a recurring basis, the customer may also want a right to terminate at will on notice to the supplier.

For any questions you may have concerning software licences contact Neil Williamson.

EM Law Neil Williamson

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