Most licensing contracts by virtue of their very commercial commonness aren't very treacherous. FN1 They tend to be boiler plate from the licensor (which means being balanced in favor of the licensor but not over so, not enough to undermine the licensee) and, so long as the IP being provided is not "out of the box", receptive to adjustments here and there. FN2
Still, read the thing. Ask the licensor to call out any special provisions they think merit your attention. And then independent of what the other party says give the following four key terms special consideration: a) the scope of the license, b) the term of the license and termination contingencies, c) service level requirements, and d) price protection.
A) The scope of the license. From a business standpoint, this is what matters. This is where the beef is. The scope is typically defined by two variables: the nature of the software being provided (be prepared to find the details describing such in an exhibit to the agreement) and what the licensee is allowed to do with it (in terms of use, modification, distribution, etc.).
The usual arrangement is that the licensee will receive a non-exclusive (exclusivity is quite uncommon in computer and electronics but less so in other industries), perpetual (for the term of the agreement) license to use (and sometimes distribute) the software in a particular way. (The right to modify or create "derivative works" is more rare and usually will be limited to internal uses or development projects with the requirement any improvements be disclosed and licensed back to the licensor).
The most commonly neglected matter here regards the involvement of third parties such as sublicensees. Make sure it's clear (and often it's not in the boilerplate agreement) what rights you have as licensee to involve a) subcontractors or consultants and/or b) customers and what kind of disclosures and use rights can be given to such persons.
B) Term and termination contingencies. Termination is probably the second most important aspect of a license agreement but weirdly it is commonly overlooked. It almost always makes sense to include a provision in the licensing agreement that allows you to back out of the agreement for convenience before the conclusion of the term. Standard language in software licensing contracts often enables the licensor to be released from the agreement for no cause but provides no such option for the customer (or licensee).FN3 More generally, the agreement should thoroughly detail the precise circumstances under which the agreement may be terminated, the consequences of termination, the obligations of the parties post termination and any available remedies and liabilities.
C) Service levels. Because parties at the negotiation stage tend to focus on the value proposition being provided by the licensor, and not foreseeable defects or system failures, it's easy to overlook service level requirements. A competently drafted licensing agreement, however, should describe a defect resolution process, the circumstances under which it is triggered, and any related refunds or credits to be provided. FN4
D) Price protection. Many licensing arrangements work on monthly or quarterly use fee, predicated on a certain base number of users (usually customers) and then additional fees (sometimes called royalties) per person for all users above that base. This potentially could become quite expensive if the anticipated number of users/customers exceeds expectations so it usually makes sense to create a price cap, allowing for royalties but not to exceed a pre-determined cost for any one month or quarter.
FN1. Three notes here. First, if a business is at the stage where is mostly or fully vertical integrated (quite rare), it would be unlikely to realize a greater profit from licensing than performing the activity itself. Second, by way of background, note that licenses are usually categorized by the licensed subject matter (software, processes, manufacturing know-how, etc.) rather than the legal category (patent, copyrights, trade secrets). The distinction does not really matter but the subtext of this is that your software agreement will likely incorporate various overlapping legal categories (patent AND copyright, for example). Third, this post is written with licensees in mind but may be useful to licensors as well. However, if a start-up is in the business of licensing the stakes are obviously quite higher and you'll be depending heavily on your counsel.
FN2. This does not discuss end user, shrink wrap, click through or other "out of the box" type software license agreements. These agreements tend to be less negotiable (but also less onerous to the licensee in the event of product failure) and typically only get problematic or reasons (mostly dealing with use by multiple employees and the complexities related to agency questions and compliance) beyond the scope of this discussion.
FN3. Sample language: "Either party may terminate this Agreement for convenience at any time during its term by providing at least ([x]) days, in the case of a termination by Licensee, or [[y]) days, in the case of a termination by the Licensor, prior written notice. Either party may also terminate this Agreement if the other Party materially breaches a provision of this Agreement and fails to cure such breach within (x) days following receipt of written notice thereof. In the event of termination for convenience by Licensor prior to the expiration of the term, Licensee shall pay Licensor a prorated amount of the fee due."
FN4. Sample language: "Licensor will use its commercially reasonable best efforts to supply a correction within reasonable amount of time for any material defect or error in the Software Product following receipt of notice thereof from Licensee. For any such defect that, in the reasonable judgment of Licensee, renders the Software Product effectively inoperable for [x] or more hours, Licensee will be entitled to a credit equal to (x%) of the monthly fees payable or paid, not to exceed in any one month a total of [x] credits."
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