Software supply is not the same as IP licensing

Taxonomy does matter.  It is important to understand whether software licence terms are in the same category as IP licence terms.  When we structure and draft contracts, we use concepts and wording that we have used in similar contracts.

In IP Draughts’ view, most commercial software licence agreements should really be thought of as contracts for the sale of goods.  It is misleading to think of them as IP licences.  It leads to mistakes in drafting and negotiation.

This is illustrated by looking at some specific contract terms.

Defining the licensed IP

An important starting point for most IP licence agreements is to define the IP that is being licensed.  In a typical patent licence agreement, the Licensed Patents are defined by reference to a detailed list of patents and patent applications, usually set out in a schedule to the agreement.

By contrast, many software licence agreements do not define what IP is being licensed.  In IP Draughts’ view, this is because the commercial focus of the agreement is on the supply of a product (albeit an intangible one) and not on the licensing of IP.

Sometimes, IP Draughts assists university clients with software licensing projects, where really what is being licensed is IP and enabling technology rather than a finished product.  In such cases, it is important to define what IP is being licensed, usually copyright in some lines of code that have been written by university staff.

This also raises a larger point, which is that there are many kinds of software licence agreement.  The focus of this article is on licences to use software, including end user licence agreements (EULAs), rather than software distribution agreements.

IP indemnities

Linked to the previous point is the question of what promises the software supplier is making that the user of the software will not be sued for IP infringement by third parties.

A practice has developed in many software licence agreements of including a provision in which the licensor indemnifies the licensee against claims by third parties for IP infringement.

This practice is not usually encountered in patent licence agreements, or at least not those in which IP Draughts has been involved.  In IP Draughts’ experience, a patent licensor might warrant (if pushed) that he is not aware of any third party IP that would be infringed by using the licensed IP, but any such warranty would usually be tightly limited in scope and would not amount to a blanket guarantee that the licensee will be protected from third party infringement claims.  In some patent licence agreements, there is an express disclaimer of any such warranty.

If one thinks of software licensing as analogous to a sale of goods, the justification for such an indemnity becomes clear.  There is an implied warranty under the English Sale of Goods Act 1979 that the buyer will enjoy ‘quiet possession’ of the goods, and case law has clarified that this warranty implies that the buyer will not be sued for patent or trade mark infringement when he uses the goods.

This implied warranty makes  sense commercially if one is buying goods, and similarly the express IP warranty and indemnity in many software licence agreements make sense if one thinks of buying a product that should be ‘clean’ in the hands of the buyer.

Such a warranty makes much less sense commercially if what is being provided is intellectual property, which gives no positive rights but merely enables the owner to stop someone else from using the inventions or other subject-matter of the IP.

Typical contract disputes

Disputes that arise under IP licence agreements are often (but not always) concerned with IP-related questions, such as whether a product falls within the claims of the licensed patents.  In England and Wales, such disputes are usually litigated in the Patents Court, where the judges are IP specialists.

By contrast, disputes that arise under software licence agreements are often (but not always) concerned with practical questions such as whether the software functions properly or has been delivered on time.  In England and Wales, such disputes are usually litigated in the Technology and Construction Court, where the judges are used to considering fact-intensive disputes.

Why is a licence needed?

The licensing model provides a convenient legal ‘peg’ on which the software supplier can hang restrictions on the use of the software by the purchaser, eg in relation to copying, location of user etc. Terms that in other sale agreements might be considered to offend the legal principle of ‘exhaustion of rights’ (and its near relatives, eg ‘non-derogation from grant’) can be justified by reference to a limited copyright licence.  A similar approach is taken in some other areas of technology, eg the use of limited patent licences as part of the sale of diagnostic kits in the medical field.

What both these examples have in common is that the licence is secondary: the primary focus of the transaction is the sale of a product.  These secondary licences are really there to restrict the licensee from doing things, rather than to grant permissions. Perhaps we need a new name for the licensing element of software contracts, that avoids the name ‘licence agreement’.  ‘Lease’ is not quite right, but has the advantage that it is already used for the supply of equipment where title does not pass to the user.  Do readers have any suggestions for a suitable name?

3 Comments

Filed under Contract drafting, General Commercial, Licensing

3 responses to “Software supply is not the same as IP licensing

  1. Vance Koven

    I think that more than a name change is needed in software transactions to capture the results that commercial parties intend. While a lease-type category may avoid some of the issues relating to transfer of title, the concept of licensing software has also justified, if not total immunity, then at least a fairly wide berth in the area of antitrust (competition) enforcement, where a licensor, having been granted by statute a limited monopoly, may carve it up (especially under copyright) and restrict pricing in ways that would not pass muster for sales of goods.

    In the US, courts have generally characterized software sold at retail to consumers as goods for purposes of the implied warranties and other consumer protections. Most software that goes through businesses, though, is of a type that, when it leaves the developer, is further embedded in other parties’ products, so one needs to consider, as you have not, the characterization of software in a distribution scheme through “value added resellers” and “original equipment manufacturers.”

  2. ct

    As a practical matter and to your point, 20-40% of the word count in software agreements addresses updates, support, and similar issues that have few or no counterparts in an IP transaction. (Let’s leave open source software out of the discussion!)

    I agree that there is a useful distinction between software agreements and IP agreements, although it’s probably too late to obtain a change in terminology. The telecom industry forged a term “Indefeasible rights of use”, or IRU, that has been widely adopted for a specific type of transaction.

  3. Vicky Clark

    I found this thought provoking – particularly the observation that IP infringement warranties and indemnities are appropriate in software licences but not patent licences. This is not always my experience in relation to patent licences. Warranties and indemnities are all about risk allocation and price. For later stage technology (be it software or patented technology), the price usually goes up and the amount of risk the the licensor is expected to accept via the provision of warranties and indeminities also increases. That said, with a traditional patent licence, I believe anti-stacking provisions are generally a fairer way to deal with third party rights than indemnities.

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