Software Licences – Different Legal Structures

Software licences come in many shapes and sizes. The range of legal solutions available to software companies is forever morphing and increasing. A significant shift has occurred with the existence of software available via cloud computing (read our blog). This gives suppliers the option of making their software available via the cloud rather than a user being required to upload the licenced software to their own server. Software licences need to maintain a balancing act between protecting the software in question and being attractive to consumers.

Monetising software

Organisations in the technology sector monetise software in various ways, including:

• Developing software from scratch, or configuring or adapting an existing core package software, to meet a user’s specific needs.
• Software licences that licence (either standard or bespoke) directly to end-users (for them to run on their systems, locally).
• Providing software-as-a-service. Read  our blog.
• Selling software outright, either as a standalone asset, or as part of a wider share or asset sale of a technology business.
• Offering other software consultancy services, such as maintenance and support or escrow deposit services.
• Software licences that licence to an intermediary, such as a software reseller or retailer, who will on-licence the software, either by itself or as part of wider bundle of products
• Licencing their application programming interfaces (APIs). See section below for a further explanation.

Software licensing

Licensing is still the main method by which most businesses and individuals obtain the right to use software, and how software vendors make money. Traditionally, software has been licensed ‘on-premise’ but recently there has been a surge of organisations migrating to delivery of software as a service via the cloud.

Why does software need to be licensed?

A software licence is typically a combination of a copyright licence, giving the user permission to do something that would otherwise be an infringement of copyright law and a contract, to give the licensor (among other things) the ability to exclude or limit its liability and the right to sue the licensee in contract as well as copyright law.

Software is protected by copyright as a literary work under the Copyright, Designs and Patents Act 1988 (CDPA). The operation of software for all practical purposes always involves its copying in one form or another, for example, when the software is copied on to the hard disk of the computer on loading and later when it is copied into Random Access Memory, for use. Subsequent further transient copies may then be made during operation. This, and the fact that software is statutorily protected by copyright as a literary work, means that the owner of the intellectual property rights in software can prevent its use without permission.

Software Licences Permitted Use

Suppliers will generally only be prepared to grant licences of package software on non-exclusive terms so that they can grant licences of the software to multiple customers. A supplier will also often restrict the use of the software in certain ways, for example, by reference to:

• The identity of the customer or a group of users associated with the customer.
• The identity and number of machines or operating system environments on which the software is loaded.
• The geographical location of the machines 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 (the supplier may have developed the software, for example, for use in a particular operating system or other software) and the manner in which the supplier typically licenses its software. The customer should ensure that any applicable 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, an injunction preventing use or termination (or all three). It is therefore important that the customer knows exactly what rights they are buying.

Technological changes can have a serious impact on licensing. For example, if software is licensed for use on a single server, one must consider the consequence if that server is included within a virtualised environment in which it can be made to function as a number of independent mini-computers or, if software is licensed for use on a specified server or at a specified location, you must consider the consequence of replacing or moving that server.

Software Licences Restricting Use

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, whether intended, as a result of inadvertence or as a consequence of organisational change. Such access may constitute a breach of the licence unless the licence permits use among group companies. This is a particular problem with utility software where what constitutes ‘use’ or ‘access’ may be unclear. If there is a virus protection program on a network, is it used or accessed by everyone whose PC is connected to the network? Consequently, the customer should ensure, where necessary, that the licence extends to all other companies in its group that are likely to use the software.

Similarly, if outsourcing is contemplated by the customer or the customer intends to engage other external service providers to provide services to the customer (for example configuration or support services), 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 or additional use.

Third parties

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 or additional 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 (the extent of which will be subject to negotiation and the respective bargaining strengths of the parties).

Software as a service

For typical on-premises software licences, the user will need a licence from the software owner (or from a licensee to whom the rights owner has granted rights to sub-license the software) to copy software to the extent necessary to install and use the software on their own computer. For software as a service, the method of accessing the software, or its functional outputs, may be different but a permission from the copyright owner will still likely be necessary. For example, with SaaS, the application software itself will not need to be installed on the user’s machine, but a generic piece of software, such as a web browser, may, and the user’s machine will still need to interface with the application software in some way. Because of this, the licence terminology used in a software-as-a-service agreement may change. For example, it may not be the application software, itself, which is licensed for use by the customer; the customer may only be permitted to remotely access certain functional outputs from the software, that is, to receive ‘a service’.

On-premise software licensing

On-premises software licences for business use (such as operating system software) are typically bundled with hardware when purchased. Sometimes a customer may ask for a trial period under which it may evaluate or ‘road test’ business software. This is typically done under an evaluation licence, which will provide a limited licence to use the software for a limited period, free of charge, with few or no warranties being provided by the software supplier during the trial period.

For on-premises software licences for consumer use it is essential that any terms and conditions for the use of software by consumers are drafted to comply with the extensive consumer protection rules that apply in the UK. Different rules apply depending on whether the trader is selling to the consumer online, ‘on-premises’ or ‘off-premises’.

Different distribution models for on-premise licensing

A software producer will sometimes distribute its software through a third party reseller, who may combine or bundle the producer’s software with its own products, or offer other value-added services. In both types of agreement, in return for gaining access to this alternative (generally, additional) distribution channel, the producer usually agrees to sell licences to its software to the reseller at a lower unit price than would otherwise be paid if the software were being distributed on its own. The consequence of this is that the reseller obtains a more limited distribution right, as it is only entitled to distribute the supplier’s software in combination with particular products of its own and/or on terms and conditions specified by the supplying company.

Competition aspects to Software Licences

Software licences may contain various restrictions which require consideration of UK competition law. These include exclusivity of the licence grant and grants of rights to improvements made by the customer. Software vendors should also be aware that, following the CJEU’s decision in UsedSoft GmbH v Oracle International Corp, they may not be able to rely on contractual provisions in their software licences which prohibit a customer from transferring or assigning the software to a third party. This only applies under certain circumstance, such as where the vendor has purported to grant the customer a perpetual licence to use the software for a one-off fee. Along with all other EU case law, UsedSoft v Oracle has been incorporated into UK law following Brexit. UK courts will, however, be able to overrule it in the future.

Open-source software

Open-source software (OSS) (read our blog) is software provided under a licence which grants certain freedoms to the licensee to use and re-distribute the OSS. It is often used by software companies whilst they develop software. There are many different types of OSS licences which differ widely in clarity, length and legal effect. There are many advantages to organisations making use of OSS. The use of OSS is usually free of charge and free of many of the use restrictions that apply to proprietary software. Using pre-made OSS components (particularly for routine, lower-level tasks) shortens the development phase for projects and frees up internal resources to develop higher-level software that confers competitive advantage.

However, use of OSS also presents risks. The main risk is often that certain types of OSS licence, known as ‘restrictive licences’, adopt the principle of ‘copyleft’. This imposes licensing restrictions or requirements where the OSS is amended, adapted or combined with any other software to produce a derivative work. While the provisions vary, restrictive OSS licences will (to a certain extent) apply to both the original OSS and any derivative works based on it. This can be of key concern to organisations when using restrictive OSS alongside their proprietary ‘closed-source’ software, as proprietary software could unintentionally be made subject to the OSS licence. An example of a restrictive OSS licence is the General Public Licence (GPL).

Application programming interfaces (APIs)

In recent years, many technology companies have grown their revenues by licensing their application programming interfaces (APIs). An API can take different forms, but typically provides a set of tools, documents, protocols, and specifications that enable software applications to communicate and interact with each other. Licensing (or opening up) its API is a way for a software vendor to invite third parties to create applications that complement the supplier’s offering. By doing so, the software vendor may get a better pool of integrated applications that enhance the user experience for the vendor’s offering, without needing to hire or otherwise engage developers. APIs can be differentiated from traditional software applications, including to the extent they are protected under law.

Here to help

There is a lot to think about when putting software on the market. Being aware of the range of licencing issues is key when putting in place a legal framework that exists to the benefit of both supplier and customer. Software licences will continue to develop as technology does and so the challenges faced by lawyers in this sector are unlikely to diminish in the face of the never-ending innovation and ingenuity that defines it.

EM law specialises in software technology law and contract law. Get in touch if you need advice on a SaaS agreement or have any questions on the above.