Monday, March 13, 2017

SaaS Contracts vs Software License Agreements

Just like technology itself, technology contracts are becoming more and more complex.  Yet, the legal theories that apply to them remain the same. Understanding the technological aspects of the transaction allows attorneys to apply correct legal terms.  Here is an example that I have encountered in my practice.

Software license agreements are used when a proprietary software is being licensed by the licensor to a licensee.  The licensor has an interest in copyrights, patents, trade secrets and other IP rights in the software and related documentation.  A license is a limited grant of those rights.  A software license can be exclusive or non-exclusive, may be limited to a specific geographic territory, with or without a right to sublicense and transfer, with or without a right to make and store copies, and with a limited scope of access and use.  All this assumes that the software needs to be downloaded or installed on the licensee's platform/network/computer.

A traditional software license described above does not apply to software-as-a-service (SaaS) contracts because the customer does not download or install copies of the software.  The customer remotely logs into the vendor's system to access and use the software, usually through the Internet.  The vendor (or its provider) hosts the software either on its server or in the cloud.  So, essentially the vendor provides a service to the customer, which consists of hosting its software and performing services to support the hosted software and granting access to the hosted software.  This is the reason why SaaS contracts do not typically have a license grant, but talk about authorization to access.  There is very limited, if any, customer customization because the software configuration is mostly uniform throughout the vendor's customer base.  Maintenance and service of the software become very important.  Typically, there are multiple service levels that are carefully negotiated.  Fees are based either on a subscription model or the volume of customer's use.  

So, why would a SaaS vendor prefer to grant a license rather than an authorization to access the SaaS services?  One reason is because in the case there is unauthorized access or use of the SaaS services, the vendors will not be able to claim an IP infringement unless there was a previous license grant.  It could still have a claim for theft of service, trespass to chattels, or a violation of the Computer Fraud and Abuse Act, but not an IP infringement.

However, a grant of an IP license creates an additional risk which probably outweighs the point I just made.  In the case of bankruptcy, the vendor may stop performing its contractual obligations, including SaaS services.  However, the Bankruptcy Court may compel the vendor to keep on performing the services if they are provided under an IP license because Section 365(n) of the Bankruptcy Code protects the right to continue to use "licensed intellectual property" but not the services.  The customer could also get a copy of the software's code and self-host it.

Now, let's complicate things a bit.  If the customer hosts the software (as opposed to the vendor or a third-party provider), the customer would need a software license (not an authorization) because it would need to make copies of the software.

As you can see, the only way to draft a correct agreement is to understand the technological aspects of the deal.

This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of corporate, securities, and intellectual property law.

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