The term ‘legalese’ is often used to refer to the sometimes strange and seemingly-redundant language lawyers employ in oral argument, briefs, and contracts. And while many non-lawyers consider legalese useless and wasteful, lawyers know that decisive, definitive diction is extremely important. Software licensing agreements are a great case in point. Take a look at the following typical standard licensing “grant clause” language:
Licensor hereby grants Licensee a non-exclusive, non-transferable, non-assignable, irrevocable, fully paid-up, worldwide license to the Software for Permitted Use.
As you can see, software grant clauses can be quite a mouthful, but each word in the clause serves a serious, necessary role in defining the scope of the granted license. Below, we break down what some of these terms mean and their critical importance.
License: In intellectual property (IP) licenses, such as software licenses, a license grant is for the right to use patents or copyrighted materials. Intellectual property rights (IPRs) include the right to reproduce inventions and works, make derivative creations from them, distribute them, and control public access to them. A license can be thought of as granting one or all of these rights to a third person to reproduce, derive, distribute, publicize the invention or work without fear of lawsuit by the actual IP’s owner. In software licenses, usually both patents and copyrights are involved, and the license should clearly set out terms for each of these IPRs, describing the who, what, when, where, how, to what extent, and sometimes even the why.
Non-exclusive: Software IPRs are exclusively held by their owner. Therefore, in any license, exclusivity is a central term. An exclusive software license will usually completely preclude the ability for the licensor to use the IP. A non-exclusive software license allows the licensor to continue to use the IP and license the IP to other licensees as well. In most software agreements, licensees desire exclusive licenses because they want to hold unique competitive advantages in the marketplace. However, in some software licensing agreements, especially those between licensors and end-users of the software, exclusivity may not be important. For example, a company probably will not care if it uses the same accounting software as its competitor. Strategic systems, however, may hold greater competitive significance.
Non-transferable, Non-assignable: Transferability and assignability terms decisively set out who may use the software being licensed. Non-transferable and non-assignable licenses of software IP restrict the use of the IP to the licensee—and only the licensee, period. These terms clearly mean that a licensee may not assign or otherwise convey the software IPRs to any other party without the licensor’s consent. Transferable and assignable licenses have the opposite effect, but can be limited by specific terms.
Fully Paid-up: Software licenses are usually “fully paid-up,” such that the licensee agrees to pay the licensor a one-time fee for use of the software IP. However, some contracts may contain yearly payments for use. Some software agreements, especially those that have competitive advantage, are “royalty-bearing.” This means that the licensee will agree to pay the licensor a certain percentage of the profits or revenues the licensee makes while using the software IP in its business operations. Royalty-bearing licenses are more risky, but they can offer greater long-term reward to the licensor if the software helps the licensee generate large returns.
Worldwide: The geographic scope of a license should always be clearly identified. Most software licenses are for worldwide use, especially since electronic commerce tends to transcend political borders. However, sometimes licenses are restricted to specific areas and regions when the software IP is licensed to different companies for different markets. In this way, the geographic scope may qualify the exclusivity of a license, such that the license may be exclusive for a specific area, but not exclusive worldwide.
Permitted Use: Lastly, what constitutes “Permitted Use” is an essential term of any software license. It restricts the use of the software IP by limiting the exact nature of the IPRs granted. Think back to what IPRs are, discussed above under “License.” Who should be able to use the software IP? When? For what purposes? How may they use it? Are there certain activities that the software IP should not be used for? The permitted use term acts as a limitation on the general software license.
If your company is looking to license software, you should work with an attorney to structure the license in accordance your specific needs. This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.