For most of us, understanding software licensing means understanding copyright law and contract law.
So a few basic principles first.
Contracts dealing with software fundamentally rely on the copyright law, and then change how copyright applies to the software.
No need to be.
We step through it here.
Let’s start with the general law.
The General Law
Let's pretend that these areas of law don't exist:
- copyright law
- patent law
- design rights
- the law of confidential information.
Just for a moment.
Anyone would be able to copy any written material.
All without fear of acting contrary to anyone else’s rights.
No fear of getting sued.
Now, let's introduce copyright law.
The author of the software or their employer owns copyright in the software.
What’s the significance of that?
Copyright law grants the owner of the software to right to prevent anyone from copying software without the copyright owner’s permission.
- Copyright a negative right.
- It gives the copyright owner the right to prevent all others from copying their work
- Copyright law grants the copyright owner a series of "exclusive rights"
- These exclusive rights define the "monopoly" of the copyright owner, and therefore
- what the copyright owner is entitled to prevent all others from doing with their copyright work.
Permissions to use these exclusive rights are set out in the Copyright, Designs and Patents Act 1988.
I'll come back to these exclusive rights in a moment.
Permissions can be granted to others to “exercise” these exclusive rights, granted by copyright law.
The same principles apply for patent law and loosely speaking, confidential information. We’re leaving those areas of law out to avoid complexity.
Enter Contract Law
Copyright owners need a way to grant those permissions to others to use their work.
Owners do that by granting "licences" to those others that they want to give permission to use their work. It's as simple as this:
A licence is a permission to use someone else’s property.
In this case, their copyright work.
The permissions are given in contracts. It is the contract – commonly known as a 'software licence' that grants that licence.
Licences can be given orally. Nothing needs to be recorded in writing. That would be quite bad though. There's nothing to record the existence or scope of the licence.
Here’s the key:
- if a permission to use an exclusive right of the copyright owner is not granted, then the (would be) licensee is not entitled to do the act
- It would be copyright infringement
- The (would be) licensee would be using an exclusive right of the copyright owner without a grant of permission.
Working out whether copyright infringement has taken place is an exercise to discover whether there was a grant of a licence that authorises the particular use of the copyright work.
It’s the permissions – the licence grant – that gives the right to use the software.
The licence grant also dictates the scope – the types uses to which the software can be put.
More on that below.
When a licence is granted under a contract, use of the software within the terms of the contract is lawful use of the software.
Everything else isn't lawful.
When use of the software is outside the terms of the contract (ie the licence grant, or permission), it is:
- a breach of contract, because the use is not within the terms of the contract, and
- an infringement of copyright, because the use of the software is not within the terms of contract.
If there was no contract at all, it would just be an infringement of copyright.
Breach of contract and copyright infringement both give rise to a right to damages. The copyright infringement gives good grounds to apply for an injunction. Injunctions however are discretionary remedies, and not available as of right.
If the breach of contract is serious enough, gives rise to a right to terminate the software licence for that breach of contract.
Using Contracts to Licence Rights
Software licences should be granted in writing so that:
- Everyone knows what is going on: what rights are licensed. They're set out in writing, in the licence
- If there is a breach of the licence, there is a document that says what the terms of the licence are
- The document sets out the existence and scope of the grant of licence.
Sure, there might be disputes about what the terms of the written licence actually mean.
Words can often be read different ways, to mean different things.
That’s where interpretation of contracts or "contractual construction" comes into play to work out what the contract actually means.
The Grant of the Software Licence
The terms of the licence sought by a licensee depends on the requirements of the business in the present and in the future.
The licence grant is fixed once it is given, unless it is renegotiated.
These days, software licences are rarely unlimited. Even in cloud-based software-as-a-service agreements (which on one view requires a software licence) licences, they are limited by time and by other resources, such as disk space.
There are many more ways to limit use of software in the grant of a private software licence.
We come on to them now.
Limitations to the Grant to use
Amongst the most popular restrictions in software licences is time. The permission to use it extends for a limited period of time.
But that's just the beginning of it.
Other common restrictions which are used are:
- by machine: limit use to a particular device or machine
- geographical: imposing geographical restrictions, where use is not permitted outside the geographical area. Usually by country
- by purpose: restrict the purpose to which the software may be put. For instance, the software licence may limit uses to a particular industry or speciality
- users: limit the number of users that may use the software, concurrently or by naming users
- multiple companies: licences can be given to an entire group of connected companies rather than one company
- volume of data: Limiting the volume of data handled by the software, measured by number of files, processor time or in say (say) megabytes
- by processors: inhibit use by the software by number of processors installed on the machine which hosts the software
Conditions of the Licence Grant
Software licences include ongoing obligations, usually to make the software licence work.
This might include rights to audit software use, measurement of statistics so that invoices can be raised.
Some countries grant a series of statutory rights to lawful users of software. The UK is one of them.
These rights, granted by legislation, are "inalienable" - the parties can't agree that they don't apply. They always apply if the conditions for their existence are satisfied.
They're subject to conditions. The main condition in the UK is that the person relying on the statutory right needs to have legal right to use the software. That is, a "lawful user".
In the UK law, the rights are:
- Right to decompile the software: output the source code of the software application from an executable.
This right can be avoided by the licensor if it is willing to make available information to the licensee to allow it to make the software inter-operable. Accordingly, offer to provide information is often included in software licences
- Right to backup: the right to make backups applies where it is necessary to use the software lawfully
- Right to adapt the software: entitle the licensee to correct errors in the software.
The licensors can exclude the right by contract. It often is in licences where maintenance and support form part of the licensor's business model
- Right to observe, study or test the functioning of software: the right exists to permit lawful users to determine the ideas and principles which underlie the software. This right cannot be excluded by contract.
A sublicence is a grant of a permission to someone else, to licence the software to others. They usually find form as reseller agreements.
The sublicence allows the software owner to take advantage of resellers’ networks which leads to better access to interested markets for the software.
Types of Software Licences
What are the types of licence?
There are 3 types:
1. Exclusive licences:
- The licensee is authorised to perform some activity in respect to the software property to the exclusion of all others. This includes the software licensor itself
- When a copyright owner grants an "exclusive licence", the owner promises to the exclusive licensee not to grant a licence to any other person for any of the rights granted by the exclusive licence
- The licence must be in writing
- Only the owner has the right to grant an exclusive licence. It may be also be granted through an authorised agent. The owner or their agent must sign the exclusive licence
- An exclusive licence can granted to distribute software within a named territory (say England).
The exclusive licensee is entitled to distribute the software in England to the exclusion of all others, including the owner of the rights licensed.
If the owner tries to grant another licence to distribute the software in England, the owner of the copyright itself will be in breach of contract. It would also infringe the exclusive rights of the exclusive licensee.
Exclusive licences can be limited in the same way as any other licence of intellectual property. This means that restrictions to a particular industry may be made to apply. Or craft a licence within the geographical area
2. Sole Licences:
- Sole licences differ slightly to exclusive licences. A grant of a sole licence is a grant which allows the licensor to continue to use the software
- This way, the licensor does not infringe the sole licensee’s rights by using the software themselves
- To speak of a “sole exclusive licence” and “sole and exclusive licence” are a mixture of legal terms that leads to ambiguity in what was actually intended by the grant of licence. It makes no sense.
It's either a sole licence or an exclusive licence.
It can't be both.
In cases where "exclusive licence" and "sole licence" are used together, the licensee and licensor need to construe the contract to work out what the legal meaning of the licence is, and its legal effect
- The word "sole" should not be used in the context of granting a licence unless that is the intention of the licensor
3. Non-exclusive Licences:
- Non-exclusive licences are the most common type of licence. It enables licensing of a single software package to many licensees
- Essentially, a non-exclusive licence is one that is not an exclusive licence or a sole licence
- They are usually granted in writing and subjects to restrictions of time, users and more often geographical constraints of use
Benefits of an Exclusive Licensee
An exclusive licensee has rights not available to a non-exclusive licensee.
An exclusive licensee is entitled to sue infringers in their own name, without the permission of the copyright owner. The licence is treated as an assignment for these purposes.
Conflicting rights amongst licences is a hazard that licensors should try to avoid.
Conflicts are when rights may have been granted by the licensor, and then a later licence deals attempt to deal with the same rights that as the earlier licence.
Where there are licensing conflicts, bad things can happen.
Consistency in Licensing
The carve-up of licenses needs to be consistent. Otherwise, the copyright owner finds itself in breach of contract with its licensees.
If two software licences conflict with one another, then it is a breach of both of the software licences.
Example of a Licensing Conflict
Suppose a software owner grants an exclusive licence to a person to distribute software throughout all the countries of the European Union.
Following that, the software owner grants a non-exclusive to licence another person to distribute the software in say the France alone. The conflict arises because the software owner gave away the rights to licence the software anywhere in the European Union.
The software owner ends up being in breach of contract twice: (1) to the exclusive licensee, and (2) to the later non-exclusive licensee.
In addition to that the non-exclusive licensee actually cannot be granted the rights to France, because the software owner already gave them to someone else.
This also means that:
- the exclusive licensee also has a claim for infringement against the non-exclusive licensee, if the non-exclusive licensee distributes the software in France.
- the non-exclusive licensee has what is known as a "claim for contribution" against the software owner for the loss suffered by the non-exclusive licensee.
Dual Licensing of Software
Provided the intellectual property rights owner retains the relevant rights, there is nothing stopping them from licensing software under multiple licences.
It’s avoiding the overlap between the different licences that makes it possible. It is also possible with open source software.
Joint Licensing: Proprietary & Open Source Software Example
Suppose I own all the IP rights (or I own them with all of its contributors) in a software package.
Let’s say I make the software available under the GPL v02 open source software licence.
I am also able to grant a licence in that software package to you on commercial terms. Those terms can be completely separate to the terms of the GPL. I'm not adding terms to the GPL by doing so. I am licensing the software package on terms completely separate to the GPL.
This is what community contribution development agreements are all about. Because the ownership of the software is centralised, the intellectual property rights in the software:
- can be licensed on the harshest open source licence, and
- separately licensed on completely different terms.
Where copyright is retained by many contributors, it becomes pragmatically impossible to obtain the consent needed from each of them to dual-licence the software. The code base is owned by too many people, some of which may no longer be contactable (to obtain their consent).
The caveat is that the open source licence contains a term that you are not allowed to licence the software on any other terms. The GPL v02 and v03 doesn't do it. That just requires that you can’t add terms to (ie on top of) the GPL licence.
New Material created during licence
Spin-off technologies or materials may be created during the course of a software licence.
You might see references to background intellectual property in some contracts. Don’t settle on the words used, read the definition. Sometimes it has a meaning different to what you think it does.
The ownership of the rights in these materials should be made crystal clear in the agreement. Also any data which may be produced in the course of the contract should be allocated to the appropriate party.
The licensor would be sensible to consider appropriate limitations of use in the permission granted, such as restrictions in the industries that the software may be used.
Whatever the contract maybe called, headed or labelled, it always depends on the precise exact wording of the licence to determine what the licence does from a legal perspective.
That's when the differences between exclusive, non-exclusive licences rise to the top, along with the terms of the licence grant.
As an example, a document might be titled “Software Licence” but it actually operates as an assignment of intellectual property rights.
It might be named a “Licence Agreement”, but actually assign the ownership rights in the software.
Don't think it happens huh?
Well, do we have news for you.
Licensing Tips: Granting licences
- Grant licences as narrowly as possible
- Restrict rights to use software to what is necessary, and expand from there, if it's necessary
- Sublicences should be subject to performance conditions or otherwise limited in the event that the transaction is unsuccessful over time. Misuse or irresponsible sublicensing may cause significant brand damage to the intellectual property rights owner
- When granting sublicensing rights to inexperienced businesses in a particular field, make sure you've got a way out if the sublicensee doesn't perform
- Licensing Model: Select your model for licensing carefully. Using the wrong model for the market conditions can leave significant sums of money on the table.
Software lawyers in London
We're specialist software lawyers. We advise on:
- proprietary and open source software licences
- avoiding the "gotchas" in open source licences when building your business
- deploying software as a service and contracts to do so
- preserving and protecting the intellectual property rights which protect your software.
We know how to build software contracts which are worthy of the task to protect your business assets.
We also know how to carve technology and software contracts which are ... not up to the job.
As technology lawyers, we know what "high availability" and "responsiveness" means in IT and in law.
We also know the speed at which the software industry works and moves. And how things change. Quickly.
Ways we've helped out others:
- selling special-purpose hardware and hand held device firmware and SaaS related services to setup supply chains through:
- reseller networks
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- prepared software development contracts which businesses can stand by
- calling out bad deals with intellectual property rights and contracts which would have hurt clients' businesses:
- inadvertent transfers of intellectual property rights, and preservation of IPR
- "inappropriate" software licences
- stitch-ups in software development agreements
- setup software licences for software used by
- airlines, national energy providers, insurance companies and banks
- industrial and manufacturers
- IBM, Microsoft, Accenture
- Apple, eBay, Amazon
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- the military and many others
- assisted plug-in developers for the likes of Final Cut Pro and Adobe Products
- checked over and fixed legal documentation that isn't up to the task it was prepared for
- reversed the affect of incomplete or just bad contracts which were meant to setup licensing arrangements properly. Before it has bitten them back and destroyed their business
- manoeuvred to exit partners from businesses:
- who aren't performing
- where the relationship is souring, before it turns rancid
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If you're looking to heavily invest your time or money in software, we're a technology and software law firm fit for purpose.
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We're at the end of the telephone for software legal advice on +44 20 7036 9282 and by email at email@example.com.