Software Licensing: How to Analyze a License (the basics)

Mar 31, 2016

A software license by itself can be deceivingly simple. It could be as short as one sentence. To understand what is actually being granted, each word of the license can be scrutinized to uncover the details. 

Here is an example of a basic license grant: “Software Publisher grants License Buyer a non-exclusive, irrevocable, royalty-free, fully paid-up, license to use the software within the territory.”

To get started, examine each right that is being conveyed.

First, what is non-exclusive? A non-exclusive license was used as an example because its the most common. The reason for a non-exclusive license may be obvious - the Software Publisher is inclined to sell the same rights to use a copy of the software to as many users that will pay for a license. So why would a Software Publisher every grant and exclusive license? Exclusive licenses can be granted when a Software Publisher develops software for a specific individual or company. 

Next is to determine why the license would be revokable. After all, if a Software Buyer purchases a license, why would it be acceptable for the Software Purchaser to revoke the license? Generally, the reason a Software Publisher would revoke a software license could be situations where it becomes illegal to continue to provide the software. However, one would have to dig deeper into the agreement to determine if any reasons are stated. Sometimes no reason is stated at all. In such case, the Software Buyer would need to negotiate clarity on this issue. Alternatively, a Software Buyer would like to see an irrevocable license.

As far as royalties, most end-user software licenses are described as royalty-free because its use will not require that a royalty be paid in addition to the payment for the license. A royalty can be an issue where existing copyrights are being used in development of software with a final product to be created and sold.

Whether the license is fully-paid generally describes whether the Software Buyer is receiving a term license or subscription, or a perpetual license. Today, we are seeing more software-as-a-service models rather than perpetual licenses. Consequently, the “fully-paid” terminology is becoming less common.

Finally, the territory refers to the geographic location of lawful use of the software. Certain rules may prevent the lawful use of software in a particular country, for example. So, the territory may be limited to a set of countries.

Dissecting a software license can deceptively easy when reviewed on its own. When a license is analyzed along with an entire license agreement, a review can become very tedious and complicated. When buying or selling software, it can helpful to seek assistance of legal counsel for advice to understand the nuances of the transaction.