--- To enhance the value and performance of procurement and SCM practitioners and their organizations worldwide ---

Essential Elements Of Software License Agreements


Russ Boyd
Russ Boyd, Sr. Purchasing Agent, Abbott Laboratories, Diagnostics Division Irving, TX 75015, 214-518-6467

81st Annual International Conference Proceedings - 1996 - Chicago, IL

This document contains those essential elements needed for various software development, license, and support Agreements in both a run time or end use application. Each element listed should be addressed as is applicable to the individual software application.

1.1 Opening
Each Agreement should include an opening paragraph identifying each of the parties and the type of Agreement being formed, ie: License, Development, or Support.

1.2 Definitions
A definition Section should be included that defines the key terms that will be used throughout the Agreement. After definition, these terms should always be capitalized when used further in the Agreement.

If the Agreement involves development of software, or modification of existing software, the following provisions should be addressed/included in the Agreement.

2.1 Description Of Work To Be Performed. A general description of the type of development work that the supplier will perform, including the type of software being developed.

2.2 Scope Of Work. A detailed description as to the scope of work to be performed, a definition of the specifications to be followed, a definition of the expectations of the supplier, and a list of the deliverables to be provided. In most cases, this will be included as an Attachment (s) to the Agreement.

2.3 Development Cost. A Section as to the cost of the development work should be included. It is highly recommended that all development work be conducted on a fixed price or "not to exceed" time and materials basis. Open ended time and materials cost with no maximum cap should not be used.

2.4 Documentation Package. A section defining the documentation that is to be delivered with the software should be included. At a minimum, the supplier should supply all necessary documentation for reproduction and support of the software. In addition, provisions should be included for update and support of the documentation package.

2.5 Development Cost. A Section should be included in the Agreement that defines the total cost of Development, and the payment schedule for the development work. In general, milestone payments should be made commensurate with development work milestones completed by the supplier. General guidelines suggest that no more than 25% of the total development cost should be paid in advance of start of the development, 25-50% during development, 25-50% at time of delivery by the supplier, and at least 20% in reserve dependent upon acceptance and approval of the software by the Company.

2.6 Company Inspection. Provisions should be included in the Agreement for inspection of the suppliers facility, quality procedures, financial records, etc. that relate to the development.

2.7 Specification Change. Provisions should be included to address any change in scope of the Agreement terms or the specifications that may lead to a revision of the development cost. Care should be taken to clearly distinguish between a scope change and warranty or other work necessary to make the software comply with the specifications. All requests for additional money from the supplier should be challenged by the Company, and justified in writing by the supplier.

2.8 Equipment. A Section identifying any equipment, tooling, etc. should be included that clearly identifies the approval process of such equipment, who will pay for the equipment, and who will own the equipment. As a general rule, if you pay for the equipment either directly, or indirectly as part of the total development cost, you should maintain ownership of the equipment.

2.9 Patent Indemnification. Provisions should be included for indemnification by the supplier to Company for infringement of the software, documentation package, development work, etc. against any patents. Many suppliers try to limit this indemnification to U.S. patents only. Care should be taken to include all worldwide patents.

2.10 Warranty. The supplier should warrant that the software will comply with all aspects of the agreed to specifications for at least a one year period. Care should be taken with this section, as many suppliers will try to limit their warranty to specific parts of the specifications, a very short time period, and/or limited warranty repair. Suppliers will often try to move warranty repair obligations to a separate Support Agreement that the Company must pay for. In addition, it is desirable that the supplier carry liability insurance for a minimum amount of $1.5 million.

2.11 Ownership. A Section should be included that clearly defines who owns the developed software. In general, if the Company pays for development, it should maintain ownership. In the event that the development work is a modification to existing supplier owned software, Company should maintain ownership of at least the modifications if it pays for such modifications. Suppliers will often times try to maintain ownership regardless of whether or not Company pays for development. Restrictions of use of the software by the supplier should be included.

2.12 Development Restriction. Where possible, a Section should be included that restricts the supplier for developing any same or similar software for any other competitor or related application of Company. This is often difficult to accomplish, especially when a modification of existing software occurs.

If the Agreement involves license of supplier owned software, either off the shelf, or Company agreed to modifications, the following provisions should be addressed for license of the software from the supplier.

3.1 Definitions. A definition Section should be included that defines the key terms that will be used throughout the Agreement. After definition, these terms should always be capitalized when used further in the Agreement.

3.2 License Grant. Provisions should be included for definition of the license being granted to Company by the supplier, and the specific rights included. A perpetual non exclusive license should be granted. A determination should be made as to whether the license is a "right to copy" (Company has the right to make copies of the software as needed to meet its demand requirements), or if the supplier will supply copies of the software. In most cases, we prefer to make our own copies of the software. Many companies include clauses that restrict license of the software in certain companies. Care should be taken to avoid these types of restrictions.

3.3 Distribution. If you choose to select a right to copy license, the supplier will only supply a limited number of diskette copies (Packaged Product) of the software.

3.4. Maintenance. If the supplier releases any interim release of the software for the purpose of correcting bugs in the Software, the supplier should be required to provide Company with such software at no cost.

3.5 Training. If the supplier is providing complex software such as application, operating system, report generation, etc., consideration should be given to requiring that the supplier include training of Company's personnel as part of the license fees paid. Additional payment for training should be avoided, if possible.

3.6 Payment Terms. Specific provisions regarding the payment terms and the amount to be paid for license of the software should be included. IT IS STRONGLY DISCOURAGED FOR ANY UPFRONT PAYMENT OF LICENSE FEES. In general, all license fees should be on a "per copy pay as you go" basis based on the number of copies distributed within a given period of time, usually per quarter.

3.7 Delivery. Provisions should be included to define either the delivery terms of the master copies (Packaged Product) of the software to be copied or used, or the diskette copies supplied by the Supplier for distribution by the Company.

3.8 Use Of Trademarks. In general, for Software owned by the supplier, the Supplier will require protection and inclusion of their trademarks within any Company software incorporating the Supplier software. Provisions should be included for grant by the supplier to Company of a license to use such trademarks and the supplier's name within the Company software and any associated literature or documentation.

3.9 Ownership. A Section should be included that clearly defines who owns the software being used. This is usually the supplier for off the shelf software and for some supplier software modified to meet Abbott specifications. Example:

3.10 Warranty. The supplier should warrant the media on which the software is supplied against any defects, and that it has been screened for viruses. In addition, the supplier should warrant the performance of the software against published specifications. Warranty for both items should be a minimum one year. Be careful, as most suppliers will only supply very short warranties in an effort to sell software support services for generation of additional sales revenue.

3.11 Disclaimer Of Warranties. In most cases, suppliers will insist upon disclaiming the UCC warranty or other UCC implied warranties. Typically, you will have to agree to such disclaimers. However, be careful to limit these disclaimers.

3.12 Limitation Of Liability. Suppliers will often times require a limitation of their liability regarding damages resulting from use of their software. These provisions should be included only as a last resort, and should be limited to reduce the Company's liability. Conversely, in no event should Company agree to any injunctive relief clauses the supplier may want to impose.

3.13 Source Code Escrow. For supplier owned software, the supplier should be required to escrow source code of the software. Care should be taken to insure that the supplier escrows the software with a reputable third party agent that specializes in the escrow and protection of software or technology documents. Generally, the supplier should pay all expenses associated with the escrow. Unique technology software, and software from companies whose financial viability is suspect should always be escrowed. It is important to note that software should not be escrowed with the supplier's attorney or bank, as they are not independent or specialize in technology and software escrow. Many suppliers will try to execute escrow requirements in this manner.

For separate Service and Support Agreements, or License/Development Agreements including Service and Support provisions, the following additional terms should be considered.

4.1 Definitions. Additional definitions should be added/included for Service and Support Agreements, or License Agreements including Service and Support provisions. Definitions should be included that describe the terms needed for required support, and that clearly define response times and priority levels.

4.2 Support
4.2.1 Customer Support and Training. Depending on the requirements of the user, consideration should be given for incorporation of provisions for training and customer support.

4.2.2 Software Support and Maintenance. Provisions should be included in the Agreement for support of the software by the supplier to correct errors, bugs, etc., and to offer telephone support as well as other types of support.

4.3 Technical Support Response and Resolution Commitments. The time in which the supplier will respond back regarding any reported errors should be defined. This should be determined based on the required response needed in regards to the severity of the problem. Also, the time to resolve problems should be defined as well as possible. Most suppliers will be unwilling to agree to a specific period of time for resolution. However, it is encouraged that for Priority One problems, a defined problem resolution timeframe be included.

4.4 Pricing for Software Support, Maintenance, and Training. Depending upon the structure of the Agreement, Software support should be included as part of the license fees paid under the Agreement. If the software support is part of a separate support Agreement, all the support costs should be defined in a monthly or annual payment. Avoid payments based on time and materials, or as a percentage of the total license fees paid to date. Also, at a minimum, software support for the initial year should be included as part of the warranty.

4.5 Effectivity . If software support is included as part of the license Agreement, a statement should be included that clarifies the effectivity of the software support provisions.

4.6 Training. It is suggested that with either Development. License, or Support Agreements, that training on use of the software be added. Inclusion of this training as part of the fees paid within the Agreement should be pursued. Separate payment for training should be avoided.

The following additional terms should be added to ALL types of software Agreements regardless of Agreement type. These terms are applicable to Development, License, and Support Agreements.

5.1 Patent And Copyright Infringement. The supplier should be required to provide protection of the software against infringement of any patents, and to provide remedies for any infringement claim. Many suppliers try to limit protection to the U.S. only. They should be required to provide worldwide coverage.

5.2 Waiver And Severability. Terms should be included that provide for protection of the Agreement due to non-enforcement of terms (Waiver), and terms that are ruled to be unenforceable (Severability).

5.3 No Assignment. It is important to include terms that prevent assignment of the Agreement to other third parties for execution of any type. However, as many companies are multi-divisional companies, be sure to include provisions for assignment of the Agreement within any other division or subsidiary.

5.4 Notice. It is important to establish terms that identify where any notice or communication regarding the Agreement is to be sent. Be sure to include electronic and fax notification.

5.5 Entire Agreement. Be sure to include a provision that indicates that no additional terms apply to the Agreement, and that any modification requires written amendment.

5.6 Governing Law. Provisions should be included that establish the governing law of the Agreement. It is preferred that this be your home state, but is flexible. However, many suppliers try to limit any legal proceedings to specific counties or cities within a given state. This should NEVER be agreed to.

5.7 Relationship Of Parties. Terms should be included that indicate that both parties are independent companies, and responsible for its own actions.

5.8 Confidentiality. Terms should be added that protect any confidential information shared between the parties that is necessary to perform the required duties of the Agreement.

5.9 Inspection Of Records. This Section should be considered an optional paragraph, and only used if required by the supplier. Suppliers will often times want certain customer data as part of the license reporting for verification purposes. Providing this data should be strongly avoided. However, if the supplier is insistent, advise them that you are only able to grant them audit rights which will allow them to verify license distribution data.

5.10 Term. A Section should be included that defines what the term of the Agreement will be, and what the effective date will be. Provisions should also be included for extending the Agreement.

5.11 Termination. Provisions should be included in the Agreement that define any and all reasons for termination of the Agreement. Standard termination paragraphs are usually for breach or bankruptcy by the supplier, and at the discretion of the Company. Termination at the discretion of the of the supplier should be avoided, especially if the software being used is single or sole sourced.

5.12 Taxes And Duties. A Section should be included that defines who is responsible for paying various taxes. Normally, the Company will be required to pay all such taxes, excluding any of the Supplier's income taxes, etc.

5.13 Non-Publicity. Terms should be included that restrict any publicity of the Agreement or the relationship of the supplier to the Company. This is an optional provision, and should be governed by the specific wishes and or policies of each company.

5.14 Signature. Both parties should be required to sign the Agreement by authorized representatives of their respective companies.

Back to Top