As I discussed in our first blog on software licensing published several weeks ago, software has transformed the way we conduct business and is quickly transforming the way we live our lives. It runs virtually all of the devices we take for granted yet use and depend upon to make our day-to-day lives, well more comfortable and convenient. Software companies make money licensing their software to their customers. More and more that licensing is done via the Internet. Among the most important provisions in a software license is the grant clause. It’s particularly important in software transactions between enterprises where the licensee processes huge amounts of data, relies on the software for all day-to-day business activities, and is a potential takeover target for larger companies.
This second blog on software licensing discusses some important points to keep in mind when negotiating a grant clause in an object code software license protected as copyrighted intellectual property.
Pay Attention to the Grant Clause
The grant clause is arguably the most important provision in a software license. It’s the provision under which the licensor grants the licensee the right to exercise, usually in a prescribed manner, some or all of the exclusive rights the licensor holds in the software. Under the restrictive copyright rule for construing software licensees, all rights are reserved to the copyright owner except those expressly granted. In other words, if the grant clause doesn’t explicitly state the uses for which the licensee can use the software – reproduce, distribute, display, perform or prepare derivative works – then it can’t use the software in that manner.
If the licensee uses the software in a manner not permitted under the grant clause, it’s infringing, and liable for damages suffered by the licensor. Many large software companies include in their business processes regular technology audits of their licensees to determine how the software is being used, and identify and collect royalties for uses not allowed under the license. For some reason I haven’t been able to figure out, once a licensee takes possession of the software it frequently forgets the scope of the grant clause and the limits on its use of the software.
Grant Clause Needs Careful Crafting
As you might imagine, from the licensor’s perspective the grant clause must be carefully drafted to convey only those specific rights the parties have agreed on. From the licensee’s perspective, the more broadly stated the grant clause the better. A well-crafted grant clause describes exactly what the licensee can do with the software. If the licensee uses the software in a manner not set forth in the grant clause, it infringes the copyright and is liable to the licensor for actual damages and all profits earned by the licensee due to the infringement. The licensee may also be subject to an injunction that prohibits further use of the software and be liable to the licensor for costs and attorneys fees. If enough is at stake, litigation can ensue and that can get messy.
When we represent a licensee, we request an affirmative statement in the license that grants the licensee the right to make copies of the software needed to operate the computer and to serve as archival copies. While the provision is a statement of law, it helps minimize the risk of infringement and breach of contract claims by the licensor, and helps speed resolution of those claims should they arise. We also try to bargain for the right to make and transfer a copy of the software to a third party who provides disaster recovery services. Many licensees want this right to protect against catastrophic losses of data due to computer system failures, natural disasters, terrorist attacks or cyber-espionage. A licensor may be willing to accept such a provision because its speeds recovery efforts and minimizes technical and financial losses. It also reduces the risk the licensee will file suit seeking to impose liability on the licensor for these kinds of losses.
When we represent the licensor, and the grant clause is drafted in such a way as to allow the licensee to make copies of the software beyond those permitted under the Copyright Act, we make sure the license contains a provision that requires the licensee to affix the licensor’s copyright notice to all copies of the software. This will helps prevent the copyrighted software from being injected into the public domain and running the risk of invalidating the copyright.
Takeaways
So remember at least two things from this blog: First, always take the time to negotiate a clear and concise grant clause that defines exactly how the software may be used by the licensee. It will reduce the risk of infringement and costly litigation later on. Second, always contact Finkel Law Group, P.C. for assistance with your technology licensing needs, whether it’s software or some other cool technology.
With offices in San Francisco and Walnut Creek, whether you’re a licensor or licensee you can reach one of our attorneys anytime to discuss you licensing needs at (415) 252-9600. You can email us at info@finkellawgroup.com.