ISSUES CHECKLIST FOR SOFTWARE LICENSING AGREEMENTS

I. This structure presumes licensing is the appropriate form of agreement (it is much less common, but another party may require the transfer of ownership of the software).

II. What is the purpose of the license?

A. Is the license for demonstration purposes?

1. If there is sensitive information being given to the prospective licensee, consider having the licensee sign a confidentiality agreement.

2. If live data is being processed during the demonstration, consider including warranty disclaimers and liability limitations (see description of these issues below).

B. Is the license for evaluation purposes?

1. How long is the evaluation period?

2. Warranties should still be disclaimed.

3. Licensor’s liability should be limited.

4. Consider having the agreement automatically converted to a permanent license (unless the licensee provides prior notice).

III. Issues with the grant of the license.

A. Who is the licensee (i.e. individual, entity, affiliates, subsidiaries, etc.)?

B. Who has the right to use the software (i.e. licensees’ employees, independent contractors, customers, clients, patients, outsourcers, etc.)?

C. If the number of licenses increases, what is the pricing?

D. What does the license extend to?

1. Does it cover a certain number of machines, a particular site, an entire enterprise, or is it installed on a licensee’s server?

2. Does it allow for concurrent uses?

E. What is the term of the license (e.g. annual, fixed for a number of years, perpetual, etc.)?

F. What is the geographic scope of the license?

G. Is the license arrangement exclusive or non-exclusive?

H. Should the licensee have the right to obtain the source code under certain situations?

I. Should a source code escrow be established?

1. How is the escrow agent selected?

2. What are the fees for the escrow (e.g. setup, maintenance, deposits and withdrawals)?

3. Consider giving the licensee the right to pay the escrow fees (which are in turn credited against other fees owed to the licensor).

4. Consider requiring that the licensee must get notice of nonpayment.

5. The escrow arrangement must include consideration (and qualify as a “supplemental agreement”) to avoid problems with bankruptcy law.

6. How is the code verified when it is placed into escrow?

i. This may entail having a “witness” compile the code into useable object code.

ii. A licensee may want to also require the filing of a tutorial that explains the code.

iii. A licensee may want to have the right to hire a programmer of the licensor.

7. As updates occur, how many deposits into escrow should be made?

8. What are the triggering events that require release of the code from escrow?

9. What is the escrow release procedure?

i. This should include notice by the licensee.

ii. There should also be notice to the licensor.

iii. If there is no dispute, the code is then released.

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J. What documentation will be provided with the software?

1. How will it be provided?

2. Will there be separate charges for documentation?

3. Are there any additional restrictions on the licensee's ability to use, copy or distribute the documentation?

K. What rights does the licensee have to the software?

1. Load and execute;

2. Adapt, modify and enhance;

3. Copy for backup and archival;

4. Distribute/sublicense;

5. Create derivative works;

6. Internal use only;

7. Provide service bureau services to third parties

8. Site location, CPU, Workstations, LAN, WAN, web, etc.; and

9. Remote access.

H. What restrictions should be placed on the grant?

1. No selling, leasing, subleasing, distribution;

2. No decompiling disassembly or reverse engineering;

3. Restrictions on the number of copies and purposes for copying; and

4. No deletion or alteration of proprietary marks or legends.

IV. How is the project defined?

A. What services are being provided?

B. How will the software be installed?

C. How will it integrate with existing systems?

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D. What is the implementation workplan?

1. What is the start date?

2. What are the progress milestone dates?

3. What is the completion date?

4. What is the time period for training?

5. What are the change procedures?

6. What progress reporting is required?

V. What provisions are there for testing and acceptance?

A. What is the test period?

B. What is the acceptance process?

1. Does it provide for approvals throughout the testing process?

2. How long does the licensor have to correct any issues?

C. What are the acceptance criteria?

1. This should apply to new visions as well.

2. Consider “tying” it to specifications in the documentation.

3. Consider having warranties incorporate these criteria.

D. What are the remedies for rejection?

1. One typical option is a refund of all fees.

2. Another option is a return of all materials.

VI. How is payment handled?

A. The licensor may want some payment upfront and as the project progresses.

B. The licensee will want milestone payments based on performance of stated project objectives.

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C. The licensee will typically want a reserve “held back” until the system has been accepted.

VII. What warranties are included in the agreement?

A. Warranties may include:

1. Warranty for fitness (i.e. any purpose that the licensee and the licensor knew or had reason to know of);

2. Warranty for merchantability (i.e. the software can be used for its ordinary uses);

3. The software is free of defects in design, materials and workmanship;

4. The software will be delivered in good operating condition;

5. The software will be compatible with the hardware and any other software recommended or supplied by the licensor;

6. The licensor has all expertise, knowledge, experience, ability and know-how to perform all of its obligations under the agreement;

7. The software is original and the licensor has all proprietary rights necessary to provide the software to the licensee in accordance with the contract;

8. Future releases and modifications will not degrade performance or remove functionality of the software;

9. The software will complete certain functions within specified times (i.e. “response-time warranties”);

10. All delivered software will be the latest available releases;

11. Maintenance and support for the software will be available for the licensor for at least a specified number of years after expiration of the warranty period;

12. The software contains no time bombs, etc., that may disable any of its components;

13. The product contains no viruses or other contaminants that may corrupt or destroy any data it processes or disable any of its components; and

14. The software will comply with certain standards and protocols.

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B. How long is the warranty period?

C. When does the warranty period start (i.e. at “system acceptance”)?

D. Is the agreement with a consumer or a business?

1. Consumer uses include personal, family, or household purposes.

2. In this case, implied warranties (such as merchantability and fitness for a particular purpose) cannot be disclaimed but rather limited to the duration of express warranties.

E. Is the agreement with a business?

1. Standard practice is to disclaim warranty for merchantability and warranty for fitness.

2. Express warranties should be limited to what is in the specifications.

F. An integration clause should be added to avoid other warranties being included.

G. There should be exclusions from warranties under certain circumstances:

1. When software is modified by anyone other than the licensor;

2. The licensee’s misuse or incorrect use of the software;

3. The licensee’s failure to install upgrades; and

4. The malfunction of any hardware.

H. A licensor may want a provision providing for an exclusive and sole remedy.

1. This is often times limited to the repair or replacement (it is important to know that if this is not done, there is a risk a court could award unlimited damages).

2. An alternative would be the refund of the purchase price.

I. The licensor’s liability can be limited in a number of ways.

1. This should include incidental, consequential, and punitive damages.

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2. The limit on damages is often times the purchase price.

3. A cap can also be negotiated (it may be a rounded dollar amount such as $10,000 or a multiply of the purchase price).

4. It is typical to exclude certain things from the cap (such as indemnification obligations for infringing uses).

5. If the limitation is reciprocal, it should exclude the licensee’s payment obligation and violation of any proprietary rights and the confidentiality provisions.

J. Licensees will typically want a warranty against harmful code.

1. This is very difficult for a licensor to agree to.

2. They may instead agree to take certain steps to determine whether a virus exists.

K. The licensor should notify the licensee of any imbedded code (i.e. that disables an application or renders the data inaccessible).

L. The licensor should be aware of the duty to warn of any problems (the contract can modify this somewhat by stating that the places he should not rely exclusively on results generated by the software).

M. Indemnification provisions should also be included.

VIII. What are the maintenance and support obligations?

A. What do they start?

B. What is the term of the support obligation?

C. What versions are supported?

D. What services will be provided:

1. Error detection, verification and correction;

2. Updates, enhancements, new releases, etc.; or

3. Telephone assistance.

E. Will there be hours of availability?

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F. Will there be on-site availability?

G. What fees will be charged?

1. Can they be increased and if so, when?

2. Does the licensee have a right to renew the services and if so, on what terms?

H. Does the licensor have a right to charge for non-maintenance services?

I. Can the obligations to provide maintenance be assigned?

IX. What miscellaneous provisions should be included?

A. There should be a provision determining what law will govern the agreement.

B. One party will typically want the other to consent to the jurisdiction that the other is located in.

C. There should be a provision on remedies (i.e. what rights the parties have if there is a dispute).

D. Is a party entitled to attorney fees if there is a dispute?

E. What rights does the licensee have to continue to use the software if there is a dispute?

THIS IS NOT INTENDED TO BE A COMPLETE AND EXHAUSTIVE LIST OF LEGAL ISSUES. FURTHER, IT SHOULD NOT BE TREATED AS LEGAL ADVICE.

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