Software License Agreements I – Scope of the License

We’ll be looking at the typical items addressed in a business to business software license agreement (as compared to an end user license agreement).  The purpose of a software license between two companies are generally for the licensor, who has valuable software, to set forth how that software may be used by a licensee and the compensation and other items applicable to the licensee’s use. Obviously the parties to the agreement and the specific software being licensed need to be identified (which issues can themselves be complicated depending on the circumstances).  After the parties and the software are identified the next thing to be clearly set out in any software license agreement is the scope. The scope is essentially the rights that the licensee has to the software at issue.  Some of the following are typically addressed with respect to the scope of a software license:

Fields of Use – this covers “how” the licensee can use the licensed software.   Related to this item, which we’ll cover this more in another blog post on the deliverables of a software license. Some basic items with respect to this are:

  • Purposes for which the software can be used.
  • How the software can be accessed – directly or through a hosting provider only. What department or site of the licensee may it be used in connection with?
  • How the licensor (or its employees or customers) may use or access the software. How many individuals or computers can the software be run on? Can independent contractors of the licensee use it?
  • The hardware that the software can be used on (or the medium it may be used through if applicable)
  • Can the licensee assign or sub-license the software?  This is usually addressed in a later provision but can be addressed early on.
  • Can the licensee modify or create derivative works based on the software?
  • How the licensee can present the software and the licensor’s name/logo – which items are more important in private label or white label agreements.

Geography – Generally the license will be for a certain nation, or area of the world.  If it is the latter, listing the specific nations instead of the more generic areas such as “the Middle East” is preferred – list it as “the Middle East (being the nations of Saudia Arabia, Oman, …)”.

  • Geographic Exclusivity – The grant of the software license should also be specific whether it is an exclusive license or a non-exclusive license.  If the license is not exclusive, the the licensor can license the same software to one or more other licensees in the same territory.  If the license is exclusive it should also be identified if it prohibits the licensor (as well as any other licensees) from competing with the licensee with the exclusive rights in the certain territory.  There are times a licensor may want the ability to terminate exclusivity due to certain reasons – such as a breach or failure for the licensee to pay a minimum royalty amount to the licensor over a period of time. In fact, any part of the scope can be changed as long as it is clearly set forth in the license agreement.

Industry Scope – the license may be granted to the licensee only for use in connection with a certain industry.  In that case its imperative to lay out the boundaries of what the industry actually is (technology is changing most industries).

Temporal Scope – It can be for a set time period, with renewals, which may be automatic or not (perpetually automatic renewals are called an “evergreen” agreement).  Term and renewal can be tied to the actions of the parties similar to that of the geographic scope (such as giving the licensor the right to terminate if royalty minimums are not met, or giving the licensee a right to renew only if they hit the royalty minimums).

Irrevocable v. Revocable – The grant of the license can be revocable during the term or irrevocable.  Generally the licensor will want it to be revocable, and if the Licensee doesn’t pay or otherwise breaches the agreement, it can revoke the license in one or more territories.  Sometimes if the licensor has the right to terminate upon a breach, it doesn’t matter if the license is revocable or not, if the licensor terminates the license, its essentially revoked (but this also terminates all parts of the agreement which don’t say they’ll survive).