Software Licensing: Principles and Practical Strategies

Abstract

Software licenses are important for all business lawyers whether they are transactional lawyers or litigators. The 2014 edition of Software Licenses: Principles and Practical Strategies provides attorneys, business executives, software engineers, and law students with the latest legal and strategic developments. The software industry is the third largest industry in America, displacing sales and leases as a means of transferring value. Over the past decade, software law has evolved from a sleepy backwater to the mainstream. Despite the centrality of software licensing to the economy of the new millennium, the law is relatively undeveloped and filled with landmines. This up-to-date software law treatise employs best practices as well as doctrine imported from the ALI’s Principles of the Law of Software Contracts, UCITA, UCC Article 2, and international commercial law, supplemented by interviews with leading software lawyers. Business lawyers as well as intellectual property lawyers need to know the anatomy of a software license, just like a medical student must master the anatomy of the human body.

Lawyers that represent either licensors or licensees will benefit from the systematic coverage of standard-form contracts, development agreements, and a systematic study of the commercial law and intellectual property issues in this book. Law students in the new millennium need to be familiar with the fundamentals of software licensing to serve their clients. Software project managers, software company executives, or global business executives will benefit from the primers on basic and specialized software agreements in this book.

E-businesses and software companies are increasingly marketing their products in a global marketplace. Exporters of software need to localize their license agreements to reflect cultural as well as legal differences in foreign countries. The law of software licensing is evolving at a rapid pace. Each chapter combines practical examples and up-to-date explanations to legal, business, and policy issues concerning software licenses. I use a hypothetical information technology company to place law, policy, and business issues in context. This continuing hypothetical illustrates software licensing in the United States as well as the 28 countries of the European Union. Each chapter emphasizes how SSC can protect its rights without infringing the rights of others in its licensing activities.

Lawyers who represent software industry clients will benefit from reviewing a short history of the industry, a review of information technologies, and a survey of licensing types. The first chapter begins with a brief history of the software industry and describes its impact on the daily life of all Americans. Software has not only become America’s third largest industry displacing durable goods, but its ubiquity in everyday life requires a reworking of contract law and intellectual property rights. The chapter surveys the most important types of software and introduces the concept of the software licensing agreement before probing the intricacies of specialized licensing.

Chapter 2 is a primer on the key concepts and terms of standard software license agreements. This chapter introduces the reader to Suffolk Software Company (SSC), a continuing hypothetical company used to address important legal issues in their licensing activities. SSC is a credible test case for evaluating the developing case law and business strategy for software licensing. The narrative of SSC gives the reader a less academic and more practical view of software contracting law.

This chapter examines the five “Ws” of every software license agreement. Counsel answering the five Ws — Who, What, When, Where, and Why — will be in a good position to evaluate and negotiate the key provisions of most software license agreements. This chapter establishes a baseline for a comprehensive audit of software licensing issues. Each subsequent chapter employs an immense number of vignettes to explain both basic and special purposes licenses.

Punch lists are heuristic devices to help lawyers or business executives ensure that all tasks are completed and risk factors considered. Lawyers representing either party in a given software licensing transaction may adapt the punch lists. The concept of “punch lists,” drawn from construction contract law, enables lawyers to double check that they have dealt with the most important risk factors in software contracts. There are a number of ways to use punch lists. For the law student and novice, they illustrate the stages of drafting specialized software licenses. For the practicing lawyer, they are “to do” lists. The punch lists for warranties and indemnification are most important in terms of any software licensing agreement. Chapter 3 explains warranty, indemnification, and disclaimers issues with the help of punch lists. Chapter 4 uses the pedagogical device of a hypothetical software company to illustrate the hottest issues that come up with breach and remedies for breach.

The next four chapters use SSC, our hypothetical company, to explore specialized software agreements. Chapter 5 is a new audit of quickwrap or standard-form software licensing agreements. Chapter 6 examines the benefits and risk factors for free, libre, and open software. Courts classify software as open source if a licensor freely distributes source code to end users. Open source has evolved as a counterhegemonic movement to the closed proprietary software distribution, which guards source code as a trade secret. Courts have yet to weigh in on the enforceability of copyleft licensing agreements. This chapter provides punch lists for avoiding liability and protecting rights while minimizing risk factors when dealing with open source software. Chapter 7 provides law and business punch lists for software development agreements. Chapter 8 is a new audit of the issues of cloud computing service level agreements.

The third part of the book (Chapters 9 through 11) examines strategic legal and business issues for the commercial law of software licensing. Courts decided software licensing cases in a vacuum of specialized legal principles until the past decade. The chapters on the commercial law of software licensing will address recent changes facing software licensors and their customers today with far-reaching coverage of the Uniform Computer Information Transactions Act (UCITA) as well as the American Law Institute’s Principles of the Law of Software Contracts approved in May of 2009. The chapters on UCITA and the Principles of the Law of Software Contracts will provide business lawyers with a solid understanding of the best available templates for software licensing transactions.

Chapter 9 introduces the Uniform Computer Information Transactions Act and presents the first comprehensive statute governing software law. Judges, legislators, and policymakers will benefit from the coverage of UCITA. The rules for software licensing are changing dramatically this past year with the American Law Institute’s approval of The Principles of Software Contacts. Chapter 10 provides comprehensive coverage of the Principles of the Law of Software Contracts, approved by the American Law Institute in May 2009, as well as UCITA. Chapter 11 presents what lawyers need to know about Revised Article 9 which includes software as a category of collateral and devises specialized rules for creating purchase money security interests in software. Secured credit concerning software licenses will increase rapidly as the software industry increasingly seeks outside funding for software development projects. With bankruptcies on the rise, properly securing software as collateral under UCC Article 9 is also critically important. This chapter also explores how to protect the licensor and licensee in the event that one of the parties files for bankruptcy.

The final part of the book focuses on cross-border software licensing issues. Software licensing operates in an increasingly flattened global economy. Chapter 12 examines the problems of American exceptionalism in licensing software in radically different cultures. This chapter explains how U.S. companies must localize their license agreements to launch successful business enterprises. From the beginning of the software industry, U.S. companies required their foreign customers to agree to U.S.-style license agreements that favored vendors. In the business-to-business sector, software agreements look pretty much the same around the world. This is the result of U.S. software agreements as setting the standard. In the business-to-consumer sector, many clauses in U.S.-style licenses are unenforceable in foreign countries. U.S. software licenses diverge markedly from the mandatory consumer protection rules governing the 28 European Community Member States. Business lawyers representing U.S. software makers need to localize license and distribution agreements to comply with mandatory consumer rules in Europe and elsewhere. Chapter 12, coauthored with Maria Vittoria Onufrio, is a comprehensive survey of European consumer protection broadly applicable to the licensing of software. The second edition features practice pointers specific to China, Europe and Latin America authored by lawyers in these countries.