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.
