What Is a Licensing Agreement?

Thanks to the rise of cloud and artificial intelligence platforms, software can now power everything from autonomous vehicles to payroll. Before business owners invest in new software or technology, however, legal professionals advise that they and their vendor of choice consider protecting their interests with a comprehensive licensing agreement. 

 “You want to have a clear description of what’s being licensed so there’s no question on either side,” says Kathryn Ossian, whose practice at Schuster Law PLC in Melvin focuses on information technology. 

The agreement, Ossian adds, sets the expectations for what each party brings to the table and should begin with a detailed explanation of the product or service being purchased. The wording may be relatively simple for out-of-the-box software; tools with functionalities customized to a business’s needs may require more extensive descriptions.   

Safeguarding Proprietary Information

Technology transactions often involve intellectual property, such as proprietary source code. Developers likely already have a patent, trademark, copyright and/or trade secret filed on the IP, but the licensing agreement specifies that they’ll maintain complete control. 

“When tech providers are allowing someone else to access their system and services, they’re typically not giving them anything more than just that access,” says Ossian. Occasionally, she adds, a software buyer might modify the program for their use and want to retain a proprietary interest in those changes, which warrants additional contract provisions.  

Sometimes companies jointly create new software or tech, and “you’ve got to deal with the IP developed during the term of the agreement,” says Mark Malven, an attorney specializing in technology transactions at Dykema Gossett in Bloomfield Hills. Malven, author of Technology Transactions: A Practical Guide to Drafting and Negotiating Commercial Agreements, encourages clients to view these as long-term partnerships. 

“In the context of a joint venture or other collaborative relationship, know who you’re getting married to and think through what happens if the relationship ends,” he says, including how assets and IP will be divided. “You’ll also often want a non-solicitation clause—essentially a promise that you won’t poach the other party’s employees or customers.”

Minimizing Risk  

Introducing technology into business operations can bring risk, so a licensing agreement must address liability. “There could be IP risks for infringement or physical harm from a product breaking down and damaging people, property or causing substantial losses,” says Malven, who frequently negotiates significant technology contracts in the automotive space. Industries typically have standard liability ranges, he adds, and neither party wants to take on too much risk. An attorney can advise on those recommended ranges and negotiate a fairer split. 

A service-level agreement can also be a wise inclusion. “If I’m going to use your [software] in my business, I want to make sure that I can access it and that it’s not going to be down during critical times,” Ossian says. Business owners should try to get commitments on uptime percentages, maintenance schedules and guaranteed response times for handling minor and critical issues.

Red Flags 

Software, particularly cloud-based platforms, may collect, store, process or transmit consumer data, so a licensing agreement without privacy protection measures is a significant concern, says Ossian. 

“We don’t have a federal data privacy law, but some states have higher standards,” she says. Michigan legislators introduced a personal data privacy bill last year that is working its way through its Senate, and Ossian expects more states to soon implement stricter laws. Meanwhile, parties can still negotiate. “If an end-user has a lot of leverage—maybe because it’s a large company—the tech vendor might also agree to more stringent data privacy standards,” she says.  

The bottom line: Never commit to deal terms without first speaking to legal counsel. Malven says parties sometimes feel pressured to agree to a term sheet without solidifying a more detailed contract or a clearer understanding. “Then they call us, and it’s hard to undo some of these big-picture threshold arrangements.” 

He says smaller transactions can be quickly pulled together using a customized form agreement, but parties should expect more complex purchases to resemble a merger and acquisition in scope and expense. For the latter, Malven continues, the extra care pays off. “Some customers are spending tens or hundreds of millions to obtain a software or cloud system that’s going to run their business, something they don’t do very often.”