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Scope of License/Ownership

■ Licenses should generally be nonexclusive, nontransferable, and nonsublicens-able, except to the extent expressly permitted by the agreement (e.g., an OEM would have the right to distribute to end users or other customers).

■ Generally, reject requests from customers to grant “irrevocable” licenses. The company should be able to terminate the license if the customer misuses the company’s intellectual property or fails to pay the agreed-upon fees.

■ Consider whether any development activities are required by the company and/or OEM to integrate the company software into OEM software/prod-ucts. License rights should be consistent with any development activity (e.g., the company should own all intellectual property that it creates).

■ Only object code (the machine-readable version of the software) is licensed. Access to company’s source code is forbidden, except in very narrow circumstances (e.g., the company generally ceases to support the product).

■ If the customer will be redistributing the company’s software to others (e.g., in an OEM arrangement), the customer must be required to include the company’s standard end-user license agreement with delivery of software or products to the OEM’s customer and ensure that the customer is bound by the company’s end-user license agreement. Other arrangements can be made, but it is key to ensuring the company is contractually protected from claims by end users.

■ The agreement should make clear the licensee will have no ownership interest in the company’s software or any modifications that the company makes to the software. Avoid all language that provides for the transfer of intellectual property rights from the company to the customer. A simple clear statement that, apart from the express license being granted, all other rights are reserved to the company and that the agreement will not be construed as a sale of any intellectual property rights.

Pricing

■ Pricing should be commensurate with the scope of the license granted (e.g., license fee for perpetual term will be more than for time-limited term, broad distribution rights cost more than narrow rights, the specific types of applications in which the company software may be used should be clearly identified). Avoid single-price, broad licenses (e.g., a one-time perpetual license for “all applications”).

■ If a fixed-price license is considered (e.g., does not vary based on number of users, installations, sites), the specific uses to which the software may be put should be clearly specified.

■ In addition to the license fees, the customer must pay an annual maintenance fee to receive support and updates.

■ Major new versions and new software products are not included in the standard support and maintenance. These may be licensed for an additional fee.

Audit Rights

■ Unless the agreement involves a fixed fee, the company should have the right to periodically audit the customer to confirm compliance with the license agreement and proper calculation of fees due to the company. In the event the customer has substantially underpaid the fees due (e.g., greater than 10%), the cost of the audit should shift to the customer.

■ Audit rights are key to ensuring the customer accurately reports and pays the fees due to the company.

Limitations of Liability

■ There are two parts to almost every limitation of liability: (i) disclaimer/exclu-sion of consequential damages (e.g., lost profits) and (ii) cap on direct damages (e.g., one year of fees paid by customer). The company should require a limitation of liability in every contract.

■ The company could agree to make the limitation of liability mutual, protecting both parties, but the company must ensure the customer’s misuse of company software and other intellectual property is excluded from all limitations and exclusions of liability.

■ In general, the company’s overall damages should be capped at the fees paid by the customer to the company in the three to six months immediately preceding the event giving rise to liability. This can be increased to twelve months, but further increases are strongly disfavored.

■ Limitations of liability are commonplace in software licensing transactions and should be insisted on in all of the company’s agreements.

■ Except for the company’s indemnity obligation, the company should not accept any other exclusions from its limitation of liability. If pressed, the company may agree to exclude breaches of confidentiality and willful misconduct. Other revisions must be approved by legal counsel.

 
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