Fundamentals in Software Licensing (J. Haislmaier - IP Institute 2010)

Fundamentals of Software Licensing
June 3, 2010

Jason D. Haislmaier
jason.haislmaier@hro.com

www.hro.com

Denver Boulder Colorado Springs Dublin London Los Angeles Munich Phoenix Salt Lake City San Francisco

This presentation is intended for general informational purposes only and should not
be construed as legal advice or legal opinion on any specific facts or circumstances,
nor is it intended to address specific legal compliance issues that may arise in
particular circumstances. Please consult counsel concerning your own situation and
any specific legal questions you may have.
The thoughts and opinions expressed in this presentation are those of the individual
presenters and do not necessarily reflect the official or unofficial thoughts or
opinions of their employers.
For further information regarding this presentation, please contact the presenter(s)
listed in the presentation.
Unless otherwise noted, all original content in this presentation is licensed under the
Creative Commons Attribution-Share Alike 3.0 United States License available at:
http://creativecommons.org/licenses/by-sa/3.0/us.

Copyright 2009 Holme Roberts & Owen LLP

Licensing
Ownership
Sharing


1


license, n.
A permission to take some action that would otherwise be
permission to take some action that would otherwise be
unlawful; An agreement under which is lawful for the
unlawful; An agreement under which ititis lawful for the
What is a license?
licensee to use the licensor’s property to do some act that
would otherwise be illegal.

“[A] license is an authority to do a particular act, or series
of acts, upon another’s property, without possessing any
ownership in that property.”


Ownership License Nothing


2

Rights
Owned

License Grant
Term and Termination
Ownership
Consideration
Reps and Warranties
Indemnification
Limitations on Liability
Additional Provisions

Rights
Conveyed

Know the available “tools”

Understand when to use them


License Grant


3

Licensee is granted
only the rights stated in the license
If it is not stated in the license,
it is not granted


Grant Clause

General Background
• Identify the software or technology being conveyed
– Definition of software or technology
– Form of software or technology
– Applicable IP rights
– Rights to any related IP, software, or technologies
– Rights to updates or follow-on inventions
• Define the rights granted
– Duration
– Exclusivity
– Field of use
– Territory
– Duration and renewal
– Termination
– Sublicensing
– Transferability

Grant Clause

Sample Provision


4

Grant Clause

Restrictions on Scope
• Do not overlook restrictions on the grant
• Contradictory restrictions limit the rights granted
• Beware of:
– Unintended limitations on the grants of rights
– Reliance on implied grants of rights
– General terms (or jargon) without additional explanation and definition


Grant Clause

Sample Provision




5


Term
• Agreements last only for the term specified
• Following the specified term, agreement expires or renews
• Perpetual vs. Irrevocable
– Perpetual
• Subject to revocation or termination
• Breach typically creates potential loss of license
– Irrevocable
• Cannot be revoked
• Breaches address through remedies other than termination
(e.g., injunctions or damages)
• Contingencies on the term
• Term of the grant and underlying IP rights
• Term of agreement and term of the grant



Renewal
• How many renewals and for how long?
• Triggers for renewal
– Automatic unless notice given
– Mutual or unilateral agreement
– Contingent on action
• Deadlines for renewal
• Notice obligations
• Will any provisions change upon renewal?
– Royalty payments
– Termination right



Termination
• Know how the agreement (and grants) can be terminated
• When can you allow a termination (and when will you want one)
– Material breach
– Failure to meet milestone or performance criteria
– Bankruptcy
– Commission of a felony (SEC violations?)
– Cease use of licensed materials
– Assignment and change in control
• Clarify notice requirements
• Additional considerations
– Will both parties have the same termination rights?
– Will there be any post-termination rights or obligations?


6


Effect of Termination
• What rights will you need post-termination and for how long?
– Access to licensed software or technology
– Transition assistance
– Copies of data or information
– Destruction of confidential information
– Use of logos and marketing materials
– Payment and accounting
• Even if there is a price, negotiate the right into the contract
• Carefully review the list of surviving provisions


Ownership


Ownership

Initial Ownership
• Focus on ownership begins well before the focus on the license
• IP ownership under applicable law can be uncertain and complex
(and even contradictory)
• Do not rely on the law to grant you ownership
• Obtain it with employee and contractor invention assignment agreements
– All inventions created in the course of employment irrevocably assigned
to the company
– Often coupled with confidentiality requirements


7

Ownership

Ownership in the License
• Expressly address ownership in the license agreement
• Boundless ways to “slice-and-dice” ownership rights within the license
• Typically
– Licensor maintains ownership of the licensed technology and IP
– Licensee expressly assigns any rights it obtains in the licensed technology
and IP back to the licensor


Ownership

Ownership of Developments
• If there is a chance that modifications will/may be made, address
ownership of the resulting developments
• Often addressed even if “modification” is expressly prohibited
• Basic options
– Licensor owns
– Licensee owns
– Mixed ownership
– Joint ownership
• Additional considerations
– Grant back of rights
– Covenant not to enforce
– Limitations on right of the owner


Consideration


8

How will you get paid?
How much will you pay?


Consideration

Fees and Payment
• Fees can be up-front or periodic
• Other payments can include
– Milestone payments
– Payments based on performance metrics
• Balance against other financial considerations (e.g., royalties)
• Any portion subject to recoupment?


Consideration

Expenses
• Typically for actions performed (or to be performed) by the other party
– Consulting
– Additional R&D
– IP procurement or maintenance
– Regulatory approvals
– Other justified and reasonable expenses
• Balance against other payments


9

Consideration

Royalties
• Periodic payments
• Calculated as a rate
• Based on a percentage of (net) sales, revenue, units produced, etc.
• Beware of references to “standard” provisions
– Rates
– Definitions of “net”


Consideration

Royalties
• Rate itself has various aspects
– Amount
– Gross or “net”
– Fixed or variable
– Maximums and minimums
– Different rate for sublicensing?
• Dependent on various factors
– Exclusivity
– Breadth and strength of rights
– Length of rights remaining
– Importance of technology
– Nature of the applicable market


Consideration

Equity
• Ownership position in the company
• Often in lieu of other forms of consideration or to allow licensor to
benefit from successful commercialization
• Can take form of actual grant of equity or warrants to obtain equity at a
future date
• Many considerations in negotiating grants of equity


10

Representations
and
Warranties


“Vendor represents, warrants and
covenants to Company. . .”


representation, n.
A present statement of fact – either by words or by conduct –
made to induce someone to enter into a contract < the buyer
relied on the seller’s representation that the roof did not leak>.

warranty, n.
An express or implied promise that something in
furtherance of the contract is guaranteed by one of the
contracting parties; a seller’s promise that the thing being sold is
as represented or promised.

covenant, n.
A formal agreement or promise, obligating a party to do some
act.


11

Representations and Warranties

Warranties vs. Representations

Warranties Representations

• Warranties are an • Representations are
“essential” part of a typically an inducement
contract to enter the contract
• Warranties are • Typically, must show
conclusively presumed that representations are
to be material to the material to the contract
contract • Substantial compliance
• Warranties merit strict for a representation
compliance


Express vs. Implied Warranties
• Express warranties
– Written into the contract
– Can take many forms
• Implied warranties
– Implied by law into a contract (UCC Article 2)
• Merchantability
• Fitness for a particular purpose
• Title and noninfringement
– Included unless expressly disclaimed
• Implied warranties are no substitute for express warranties
– Title/right to license
– Development and delivery
– Performance (of software and services)
– Third party code
– IP infringement


Disclaimers
• Disclaimers are generally effective against implied warranties
• Can help to show intent as to express warranties
• Specific legal requirements for disclaiming implied warranties

• Disclaimers often used with limitations of remedies


12

Limitations of Remedies
• Contracting parties may limit liability by limiting available remedies
• Generally enforced unless the limited remedy “fails of its essential purpose”
– Circumstances existing at the time of the contract have changed
– Enforcement of the remedy would leave one party with no actual remedy
• Often used by vendors to limit remedies – repair, replacement,
re-performance or refund
• Can also be used by companies to limit liability
– Failure to pay
– Failure to purchase sufficient licenses
– Early termination
• Limited remedies should be viewed separately from other broader
limitations of liability


Indemnification


“Vendor agrees to indemnify, defend and hold
harmless Company from and against. . .”


13

indemnification, n.
A duty to make good any loss, damage, or liability incurred by
another. The right to claim reimbursement for loss, damage, or
liability from a person who has such a duty.

hold harmless, vb.
To absolve (another party) from any responsibility for damage or
other liability arising from the transaction.

defend, vb.
To represent (someone) as an attorney to deny, contest, or
oppose (an allegation or claim).


Indemnification
General Information
• Traditional areas for indemnification
– Personal injury and property damage
– Breach of warranties
– Negligence and willful misconduct
– Infringement of IP rights
– Breach of applicable law
• Increasingly common
– Open source software
– Security failures
– Breaches of confidentiality provisions
– Breaches of privacy provisions
• Consider in combination with limitation on liability


Indemnification
Sample Provision


14




direct damages, n.
Damages following from the type of wrong that is complained of;
compensatory damages for harm that is reasonably expected.

special damages, n.
Damages alleged to have been sustained in the circumstances of a
particular wrong; must be specifically claimed and proved.

consequential damages, n.
Losses that do not flow directly and immediately from a wrong but that
result indirectly from the wrong.

punitive damages, n.
Damages awarded when the defendant acted with recklessness or malice;
intended to punish; generally not recoverable for breach of contract.


15


General Information
• Liability limitation clauses are generally enforced
– Even if an exclusive remedy fails
– Can create an issue if they are truly “unconscionable”
• Limitation of commercial losses in a commercial contract – ok
• Limitation of losses for personal injury or death in a commercial contract – not ok
• Use as a “safety net” beneath disclaimer of warranties and limitation of
remedies
– Limit actual damages to no more than the value of the contract
– Eliminate incidental or consequential damages
• Include exceptions to address areas of heightened concern with vendors
– Traditional exceptions: indemnification, confidentiality, violations of IP rights
– Increasingly common: security and privacy





“Boilerplate” Can Be Important
• Assignment
• Choice of law
• Choice of venue
• Force majeure
• Maintenance and support
• Export control
• Insurance
• Waiver and modification
• Confidentiality
• Escrow


16

Closing Thoughts


Closing Thoughts

Consistency is Key
• Develop a strategy for each license (no matter how rudimentary)
• Develop checklists to aid in review of agreements
• Develop form agreements and provisions
• Understand what (really) matters to the business in the deal
• Establish conceptual agreement before drafting anything
(or paying someone to draft anything)
• Keep things simple
• Retain experienced counsel (not just experience with IP, but
experience with software and technology transactions)


Thank you.
Jason Haislmaier
jason.haislmaier@hro.com
@haislmaier

www.hro.com

Denver Boulder Colorado Springs Dublin London Los Angeles Munich Phoenix Salt Lake City San Francisco

17

Fundamentals in Software Licensing (J. Haislmaier - IP Institute 2010)

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