The Most Important Terms of SAAS & Software License Agreements.
Whether or not you are selling software or buying it, you will want to have a great SAAS or software license agreement in place. While these agreements are similar, they have crucial differences that you should understand based on the particular deal you are considering. At the most basic level, SAAS agreements are agreements where the developer licenses out software to a company or individual for a monthly fee. Typically, the developer hosts the software, while users access the software through the cloud. On the other hand, with a software license agreement, the software is typically physically installed on the user’s site, often called “on-prem.” These different software deal structures require different agreements.
No matter what type of SAAS of software license agreement you may be negotiating or drafting, I would highly recommend reaching out to an attorney. While there will be common elements to every agreement, what is reasonable, market, and critical will vary by industry, product, and service. That said, whether you are negotiating or drafting a SAAS Agreement or a Software License Agreement, you will want to make sure you have a firm understanding of the below provisions and that the provisions in your agreement work for you:
Scope of License and Access.
There is a difference between a license to use software and access to use the software. SAAS agreements often only require users to have access, since the software is not typically stored directly on the user’s system – the user merely has access to the software via the cloud. Since the software is not physically stored/uploaded on to the users system, the user’s system is not storying copies of the software, and therefore a license is not usually necessary. That said, sometimes the software may require or offer both access via the cloud as well as downloadable components, in which case, the agreement should contemplate both a license and access.
There are different levels of a license a user can have to use the software. A very market and straightforward license scope would be a “non-exclusive, worldwide, revocable license to use and copy the product.”
This kind of license would permit the user to use the software (along with other customers, since this is not an exclusive license) wherever the user is based (since the license is worldwide), but for a limited amount of time (since the license is “revocable” and not “perpetual.”)
A license should only be exclusive if the developer intends to only have one customer at a time. If the developer is creating software specifically tailored for a specific customer, then that likely requires a different agreement altogether (i.e., a software or IP assignment agreement or independent contractor agreement).
Other considerations include which users will enjoy access to the software. If the user is a multi-national company, will offices have access, or just a few, or just one? The level of access is likely directly correlated with the number of service outages and tech support calls the user has, so this should be considered in relation to the cost of the license or software subscription.
The purpose of the access should also be defined. There are multiple reasons to clearly define how the user is allowed to use the software. One of the most important reasons is that the developer is likely not liable for its indemnification or warranties language in the event the user misuses the software. The purpose should be defined to explicitly exclude illegal purposes, such as infringement or harassment. If a user is using the software to do anything illegal, then the agreement should permit the developer to revoke the license immediately.
Intellectual Property Rights.
The agreement should clearly state both sides retain all of their intellectual property rights, and that the license or other grants of access to use intellectual property are not resulting in any actual transfer of ownership of intellectual property rights.
Governing Law.
The agreement should dictate, in the event of litigation, what state (or in the event of an international agreement, what country) laws should govern the agreement and where litigation or arbitration will need to take place.
Data Protection.
The Agreement must also specify the responsibilities of both the software provider and the user when it comes to protecting the user’s data. The user may only be providing its own personal data, in the case of consumer software, but the user may also be another business and consequently might provide personal data of millions of others to the software provider. Whatever the case, to confirm compliance with GDPR, CCPA and other relevant privacy laws, the Agreement should be very clear here on items such as to what level, if any, the data is encrypted, or how often the data will be backed up, or what happens when there is a data breach.
Warranties.
Warranties are linked closely with service level agreements. A warranty, in the context of a SAAS or software license agreement, is essentially a promise about the quality of the software. Depending on what the software is, there may be extensive warranties, or none at all. Most SAAS or software license agreements directed to businesses will offer at least a basic warranty, but most SAAS or software license agreements targeting individual users (rather than large or enterprise-level businesses) will often offer no warranties.
If you’re the user, you want warranties. You want the developer / software provider to make as many promises as possible to you about the quality and performance of the software. But don’t expect to get many warranties, if any, unless you’re a large commercial business.
If you’re the developer or software provider, you will want to avoid making any warranties. You can expect some users (especially business-level users) to push back on this, but you can point to historical datapoints (such as how rarely, if ever, your software goes down and how quickly you rebooted on the last disruption of service).
If you’re the software provider, you also may decide it’s worth it to offer some warranties in exchange for getting other terms you want. For instance, as the software provider, you may want to avoid the user being able to terminate the contract for convenience. You’re likely spending a fair amount of cost onboarding the user, and if they terminate the contract in the first 30 days, you may be out of significant money. You might be able to negotiate a longer term in exchange for offering warranties by using those warranties to put the user’s concerns at ease about the software potentially not working.
Service Level Agreement.
The Service Level Agreement is not in every SAAS or software license agreement, but when it is included, it governs the specific level of service the software provider will be promising to the user. It is similar to warranties (discussed above), but it is more specific, especially with regard to the service’s uptime percentage (or in other words, what percentage of time will the software actually be available and working properly).
Liability / remedies.
This section clarifies if the software provider is liable for any damages in the event something goes wrong, and to what extent they are responsible. If you are the user, is it much better for you if there is no liability cap, or a very high liability cap. If you are the software developer, you want a very low liability cap, or disclaimer language that specifies the software developer is not responsible for any damages.
It depends on what the agreement is for, but it’s common in SAAS or software license agreements directed toward consumers (and not other businesses) for the software developer to disclaim any liability (i.e. not be responsible) in the event the software malfunctions. The opposite is true when dealing with SAAS or software license agreements that target other businesses. Generally, the larger the user is, the higher the liability cap the software developer will need to agree to, though 6-9 months worth of fees is a fairly standard range.
Pricing.
The Agreement should be specific about the terms of payment. Will there be a lump sum in the event of a perpetual license, or will there be monthly or quarterly or annual fees?
Term.
Whatever access or license to use the software is ultimately granted, that access should be revoked when the agreement terminates, unless you are negotiating a perpetual license, in which case the license should survive indefinitely. The agreement may terminate at a specified time, such as a year or more from the date of the agreement. The agreement may include language to terminate for convenience, which would be an unspecified time, but would be as a result of either the developer or the user determining they would like to terminate the agreement for various reasons. Regardless of when and how the agreement terminates, it should be clear the license/access to the software terminates when the agreement does.
Other Considerations.
It’s also very important to understand that, while a SAAS or software license agreement may be critical to your business, you will likely need other very important agreements to properly run your business, including:
- Privacy Policy and terms of service/use to set expectations with your customers and confirm compliance with privacy laws like GDPR/CCPA;
- Employment and Independent Contractor Agreements;
- Intellectual Property Assignments;
- And Protecting your brand with US Trademark registration.