How To Prevent Software License Disputes: Upfront Legal Review

While counseling a client who was considering acquiring another company, Nicholas Hasenfus, an attorney with Holland & Knight in Boston, discovered a big problem: The about-to-be-purchased business believed it owned key business software, which it paid about $2 million to develop. “We looked at the contract with that developer, and it said, No. 1, the developer owns everything and No. 2, the provider is not permitted to sublicense or use the software except for internal business purposes,” Hasenfus says. “So they couldn’t even use the software as intended, which was to license it to third-party customers.”

Fortunately, Hasenfus was able to negotiate an amendment to the contract. “But it could’ve been easily avoided and much more cost-effective to do that on the front end,” he says.

“That’s a pretty extreme example. On the other hand, it’s not really uncommon [to have a situation where] the contract doesn’t reflect what the business parties thought the deal was going to be. And, as most attorneys will tell you, what you signed is what matters.”

Why License Software?

Business owners routinely license software for everything from tax prep to sales without understanding the contract, which specifies the rights of the developer and user, how the technology can be used, and how it’s paid for. While CDs and other “on-premises” software once dominated the industry, most are now hosted as SaaS (Software as a Service) in the cloud.

There are two basic types of software:

• Closed. Purchased with a one-time or recurring fee.
• Open source. Free but can’t be used to make money or share with your entire team.

Having a lawyer review your business’s software licensing agreement can help ensure the terms are clear and legally sound, reducing the risk of future legal disputes.

Before Signing, Understand the Terms of the Agreement

Before you sign a licensing agreement, determine exactly what you want to use the software for and for how long. Are the terms negotiable? This isn’t likely with a large company like Microsoft, but a smaller vendor might be willing to make concessions. Who will own it? If you hire a developer to create specialized software, you don’t want them selling it to your competitors.

Make sure you understand the warranties, limits of liability, and indemnity clauses, along with the maintenance and support offered with the agreement. Be careful with the rights you give away. “If I was getting software to manage my air conditioning units,” says Hasenfus, “I wouldn’t really expect to be providing them any personal information other than who the business contact is. So you would want to make sure they’re not asking for those things, and you’re not providing them.”

A technology transaction attorney can guide you through the process, from vendor selection to contract termination and help you choose the product that makes the most sense for your company.

Common Pitfalls in License Agreements and Usage Rights

David Rickerby, an attorney with Boston Technology Law in Cambridge, Massachusetts, sees major issues in a few common scenarios.

1. Sharing a Single License Among Team Members

“I think the biggest concern, and the place that I see most people get in trouble, is people who buy a single license and then share the ID between all the different members of their team and end up with big, nasty claims,” he says.

2. Giving the Licensor Leverage Through Critical Infrastructure

“The other place that I see problems is people who are investing in something that’s a critical piece of infrastructure, and they can’t afford to have it go down, or if they have a dispute, they can’t afford to not have access to the data for 24 or 48 hours. And that creates an awful lot of leverage on behalf of the software vendor.”

3. Not Knowing Where Your Data Is Stored and How To Retrieve It

What’s more, says Rickerby, “It’s critical when you’re licensing software to know where your data is going to be, what it’s going to be used for, and how you’re going to get it back if things start to go sideways.”

He says to be sure to ask if you can get your money back if the software doesn’t work, and to verify that you can access your data at any time. And don’t forget to keep a backup, just in case.

Understand Potential Risks Associated with Artificial Intelligence

With the surge in artificial intelligence comes an even greater security concern. You may want to avoid granting rights to mine or sell your information, or your customers’, for the use of training AI.

While representing an investment fund firm that had been licensing a particular type of software for decades, says Rickerby, “They realized that it would be a real problem if AI was seeing how their fund managers worked placing their investments and making recommendations based on how their fund managers were investing. Suddenly this becomes an issue.”

Have an Exit Strategy

Finally, have a plan in place to delete your data when the licensing contract ends and an exit strategy in case you need to switch vendors, says Hasenfus. “It’s typically easier to get those in the beginning of an agreement than five years down the road, if the relationship has gone sour.”

Get Experienced Legal Counsel

Visit the Super Lawyers directory to find an experienced technology transactions lawyer who can review your license agreement for legal issues regarding the scope of the license, the use of software products, license fees, and other legal requirements. An attorney will be able to review your specific needs and give tailored legal advice. An attorney can also provide critical assistance if you’re facing a legal dispute over usage rights or breach of contract.

To learn more, see our overviews of technology transactions and intellectual property rights.