Understanding and Using Key Licensing Terminology
By Tom D. Le, Attorney, Stradling Yocca Carlson & Rauth

Some of the most seemingly straight-forward licensing terms in software licenses often have legal and business consequences that are anything but straight-forward. Understanding and using these terms in a precise and considered manner will help avoid unintended outcomes.

Among the most commonly used licensing terminology are four terms used to set forth the basic rights being licensed -- the right to use, reproduce, modify and distribute, and four terms used to further define or limit these basic rights -- exclusive, perpetual, irrevocable and sublicensable.

Most software licensing professionals undoubtedly have come across these licensing terms. On the one hand, these terms are useful shorthand references to describe the basic deal being entered into by the licensor and the licensee. On the other hand, while in many cases these terms are seemingly straightforward, they often have unintended legal and business consequences. Because they are so commonly used, however, the software licensing professional may overlook these consequences. Discussed below are the meanings often ascribed to these licensing terms, and some business considerations surrounding their use. The reader should keep in mind, however, that the precise meaning of each of these terms will be subject to applicable law and to the particular circumstances of the license.

Basic Grant Rights


Use. The right to "use" is essentially the right to operate software. Where the licensee has a particular purpose for the software, the term "use" should be coupled with that purpose. For example, if the software is intended to be used internally to manage the licensee's business, the license should so state. The parties may also consider the applicability of limiting the right to "use" to a specific location or to a specific number of users or seats, or as to the type and number of transactions.

Reproduce. The right to "reproduce" or copy is often meant to support the other uses of the software granted under the license. For example, if software is to be used internally, the right to reproduce is often limited to making the number of copies necessary for the number of users of the software and for archival purposes. This would be in contrast to reproducing software for the purpose of further distribution.

Modify. The right to "modify" software is, as with the right to reproduce, often intended to support the uses of the software being licensed. The right to modify should be limited to the purpose for which the licensee will modify the software. For example, the right to modify may simply be related to modifying a particular application to work with the licensee's operating systems, or may, in contrast, relate to the research and development of improved software. Other considerations might include access to the source code underlying the software, determining which party owns the modifications, and the relative rights of the parties to use the modifications.

Distribute.
The right to "distribute" may include the right to market, promote, offer for sale and sell software, and the licensor and licensee should be specific as to which of these rights are being licensed. The licensor and licensee should also consider any applicable limitations to the licensee's right to distribute, such as whether the software may be distributed as a stand-alone product or as a bundled product, territorial and pricing restrictions, and liability for the software in relation to end-users of the software.

Terms Further Defining the Basic Grant Rights

Exclusivity. Each of the basic license rights (i.e. the right to use, reproduce, modify and distribute) may be granted on an exclusive or non-exclusive basis. Exclusivity means the ability of the licensee to exercise such rights at the exclusion of all others, including the licensor. Where the licensor grants to the licensee the exclusive right to distribute software, the licensor might consider making the exclusivity conditioned on minimum royalties or selling efforts by the licensee (e.g. best efforts). The conditions may be an important means of ensuring that the licensor realizes a return on its investment in the software, since no other party but the licensee may sell the software. Other business considerations include the scope of the exclusivity (e.g., territory, duration, applications and fields of use) and any residual rights allowing licensor to continue to use the software. In addition, the licensee may desire to include in the license agreement measures to help protect the licensor's intellectual property from being invalidated or infringed as a means of protecting licensee's exclusive rights. These measures may include the right of the licensee to take actions to prosecute and maintain licensor's intellectual property rights and the right to sue others for infringement of the licensor's intellectual property rights.

Perpetual. The term "perpetual" generally refers to a license of unlimited duration. However, for most practical purposes, the duration of a perpetual license is limited to the duration of the licensor's rights in the intellectual property underlying the software. The licensee might consider verifying the extent of such underlying intellectual property as a means of determining the practical duration for which the licensee can rely on the license for its business purposes. The licensor and licensee should also distinguish a perpetual license from a license that can be terminated at-will by the licensor.

Irrevocable. An irrevocable license is most often understood as a license that cannot be terminated under any circumstances, including for breach of the license itself by the licensee. The licensor's remedy for such breach would be limited to damages. Unlike the term perpetual, the term "irrevocable" relates to a limitation on the remedies upon breach of the license agreement and not as to the duration of the license. For example, a license may be irrevocable for a specific amount of time or upon the achievement of certain conditions precedent. Where software is critical to the operation of a licensee's business, the licensee might have a strong incentive to require that a license is irrevocable. Conversely, the right to revoke a license may be a licensor's only significant means of ensuring that a licensee complies with the license agreement (particularly where the prospect of suing for damages in court is unappealing).

Sublicensable. Each of the basic license rights may be sublicensed by the licensee, if the license so permits. The licensor and licensee should specify the specific right that is sublicensable. For example, the licensee may want to sublicense the right to modify software so a third party contractor can perform modifications, while the licensor desires that only the licensee be allowed to use and distribute such modified software. The licensor might also consider placing restrictions on the right to sublicense, such as reasonable approval of the sublicensees, provisions allowing the licensor to sue the sublicensee directly for breach and confidentiality and other restrictions on the sublicensee.

 

For more information, contact Tom Le at the law firm of Stradling Yocca Carlson & Rauth, 660 Newport Center Drive, Newport Beach, California, 92660, (949) 725-4000, www.sycr.com. Stradling Yocca Carlson & Rauth specializes in helping clients protect and commercialize their proprietary technology and intellectual property rights. The firm has extensive experience in negotiating and drafting domestic and international licensing agreements that govern publishing, distribution and marketing rights, OEM and other distribution and manufacturing agreements, and agreements for the acquisition and development of intellectual property through joint ventures and strategic partnerships.

 

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